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CENTRAL BANK OF THE REPUBLIC OF TURKEY

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MONETARY POLICY IN 2002
(Updated and revised as of July 2002)
August 2002
CENTRAL BANK OF TURKEY
1
Outline of Presentation
Monetary Policy Framework – Exchange Rate Regime
Monetary Policy Strategies
Assumptions, Communication – Accountability, Transparency, Interest
Rates Policies, Monetary Targets, Inflation Targeting
Current Situation and Expectations in Economy
Stability Indicators, Price Stability and Growth, Balance of Payments,
Monetary Targets
Price Developments
January – June developments, price movements in the future
Outlook for Exchange Rate Policy
Outlok for TL Policy
2
Monetary Policy Framework
Exchange Rate Regime
Characteristics of the 2000 Monetary Policy and
Exchange Rate Regime
пѓј It was based on a fixed currency peg exchange regime, daily
values of which being predetermined,
 The Central Bank’s influence over short-term interest rates
were limited.
While the Central Bank assumed the exchange rate risk,
the interest rate risk was borne by market.
пѓј A gradual transition to floating exchange rate regime was
envisaged.
3
Monetary Policy Framework
Exchange Rate Regime
Under the free floating exchange rate regime;
 The Central Bank’s control over short-term interest rates has
been increased.
пѓј Level of exchange rate has started to be determined
according to the supply-demand conditions of markets.
пѓј In other words, while the Central Bank has begun giving
strong signals regarding short-term interest rates, the level of
exchange rate has been left at the discretion of markets.
4
Monetary Policy Framework
Exchange Rate Regime
пѓј
пѓј
пѓј
пѓј
пѓј
There are some advantages and disadvantages in both
exchange rate regimes.
Under fixed exchange rate regime;
Exchange rate, a variable that the public opinion can follow
daily, is an effective anchor in steering expectations.
Moreover, there is strong correlation between inflation and
exchange rate.
Central Bank has no control over short-term interest rates.
Central Bank must enjoy strong international reserves and
additional reserve facilities.
Predictability of exchange rate can accelerate short-term
capital movements.
There is no flexibility against external shocks.
5
Monetary Policy Framework
Exchange Rate Regime
пѓј
пѓј
пѓј
пѓј
Under free floating exchange rate regime;
There is no anchor that the public opinion can follow closely.
Therefore, inflation itself must be used as the most effective
anchor in the inflation targeting system.
Central Bank does not need to hold high international
reserves for maintaining exchange rate stability. However, a
certain amount of reserve might be needed for servicing external
debts. The fact that exchange rate risk remain in market will
limit short-term speculative capital movements.
Its flexibility against external shocks is rather high.
Expectations of current account deficit or surplus play an
important role in setting exchange rate. Another factor affecting
the level of exchange rate is the change in Turkish lira and
Foreign exchange portfolios of domestic residents due to
domestic and foreign political developments.
6
Monetary Policy Strategy - Assumptions
Monetary policy strategy has been set up in line with the following
hypotheses.
пѓј
Maintaining a well-functioning floating exchange rate regime
under which price stability is the overriding objective of the
monetary policy;
пѓј
Continued sizeable public sector primary surplus in order to
lessen public sector debt stock;
пѓј
Completion of the banking sector restructuring; activation of
fund transfer channel between financial sector and real sector.
пѓј
Enhancing the role of private sector in the economy.
7
Monetary Policy Strategy – Communication
Accountability
The CBRT aims to improve the mechanisms of
communication so that economic agents are in a better
position to evaluate monetary policy implementation.
So, the cost of achieving our final objective will be kept at
minimum.
In this context, the CBRT informs the public of all its
implementations in detail.
To ensure accountability, the CBT provides information to
the public, to the Parliament and to the Government
periodically regarding monetary policy implementation.
8
Monetary Policy Strategy - Transparency
Increasing transparency makes monetary policy more
predictable, more effective and more credible in order to attain the
final objective. Expectations become more sensitive to the Central
Bank’s decisions.
пѓј Political transparency: Clear-cut goals; inflation targets,
пѓј Transparency in monetary policy: Written announcements
such as change in short-term interest rates,
пѓј Operational transparency: Openness in interventions in
markets and policies,
пѓј Economic transparency: Quarterly Monetary Policy Reports,
Annual Report, Auditing Reports, which evaluates past
performances and future expectations.
9
Monetary Policy Strategy – Interest Rates
The CBRT takes its decisions by looking into the future inflation
within the framework of its fundamental objective of achieving price
stability.
To bring down risk premium and therefore real interest rates, it is
important to ensure that
1.
Priority is given to inflation targets and forecasts only,
2.
A sustainable economic growth and a rise in employment are
secured.
As in the past, targeting other subjects such as balance of
payments, exchange rates, gowth, public finance, banks will provide
mixed signals to economic agents. In this case, risk premium and
real interest rates will increase. This should be avoided.
10
Monetary Policy Strategy – Interest Rates
High real interest rates in Turkey is the result of the
previous crises and high inflation environment, not the
nominal interest rates.
To get rid of this situation;
пѓј First of all, strict determination must be shown in fight against
inflation.
пѓј Tight fiscal and monetary policies must be implemented
coherently and decisively.
пѓј To increase economic productivity, structural reforms must
be realized as soon as possible. In this context, reform in
banking sector is vital.
11
Monetary Policy Strategy – Interest Rates
пѓј
Under structural reforms significant steps have been taken to solve the problems of the
banking sector. The following issues have been realized within the last one year period;
1.
State-owned banks reduced their short-term borrowing requirements. They were restructured
according to good governance principles. Their operational profits increased by reducing
disguised employment and by closing down non-profit-making branches.
2.
Private banks that have lost equity capital and that might create systemic risk were put out of the
system. Moreover, private banks were separately audited by two independent agencies and the
BRSA. Capital adequacy ratio of the system is being brought to interntional standards.
3.
In order to overcome problems between the banking sector and real sector, the so-called Istanbul
Approach has been put into operation.
4.
Therefore, in the period ahead, a sound foundation has been laid for a healthy relationship
between banking and real sectors, and for enhancing productivity in the economy by utilizing
resources more rational.
пѓј
Moreover, efficiency of the banking system will greatly contribute to monetary policy
implementations.
12
Monetary Policy Strategy – Short-Term Interest
Rates
Under the floating exchange rate regime, short-term interest rates are the
most effective instrument of the Central Bank in achieving its primary objective
of price stability.
Interest rate decisions are based on which factors?
 Surveys on inflationary expectations and the CBRT’s internal inflation
forecasts.
пѓј Price-setting behaviours of the public and private sectors,
пѓј Exchange rates and balance of payments position,
пѓј Wages, employment and unit labor costs,
пѓј Aggregate supply and demand,
пѓј Fiscal policy indicators,
пѓј Monetary and credit aggregates,
пѓј International economic and political environment
13
Determinants of Interest Rate Policy
In light of these figures, it is apparent that the Central Bank reduced
short-term interest rates in a controlled manner in the January-May
period.
Maturity
Quotations
Previous
Rates
Overnight
(O/N)
Borrowing
59
57
54
51
48
Lending
62
62
61
58
55
Borrowing
62
59
55
52
49
One
Week
20 February
2002
14 March
2002
8 April
2002
30 April
2002
14
Determinants of Interest Rate Policy
• Starting from the second half of May, the volatility in
the foreign exchange and TL markets, and the reversal
of downward trend in inflation expectations have been
decisive factors to prevent a further reduction in
interest rates.
15
Monetary Policy Strategy – Monetary Targets
Monetary Base is the nominal anchor of the monetary policy.
Despite widely-recognized limitations, monetary base is a very visible
aggregate that can serve as a monetary program guide.
In the monetary program, monetary base has been targeted in line with the real
growth and the target inflation.
пѓј It has been targeted to increase by 40 percent nominally in 2002. In the
first six months of 2002, monetary base increased by 15.7 percent
nominally, and by 3.3 percent in real terms.
пѓј This target, however, will be adjusted in accordance with changes in
demand for base money.
This procedure, together with the prudent fiscal policy and structural reform
measures, will efficiently encourage economic agents’ inflation expectations to
converge towards price projections contained in the economic program adopted
by the Government.
The continuation of tight fiscal policy and realization of structural reforms will
decrease the cost of bringing the inflation down on one hand, and increase the
efficiency of the monetary policy by reducing the gaps between the inflation
expectations and targets on the other hand.
16
Monetary Policy Strategy – Inflation Targeting
What is Inflation Targeting?
Under the floating exchange rate regime, the CBRT will switch to
Inflation Targeting system in order to increase the efficiency of monetary
policy and to shape expectations. “Inflation Targeting” means not only
announcing an inflation forecast, but also conducting a monetary policy
by which a Central Bank commits itself to use monetary policy
instruments towards the target inflation only.
Under the floating exchange rate regime, inflation targets serve as
nominal anchor for monetary policy and inflation expectations.
The Central Bank has no target for exchange rate, and can react flexibly
against shocks.
The success in hitting the announced targets will enhance the public
confidence in the government and monetary policy authorities.
17
Monetary Policy Strategy – Inflation Targeting
Main Subjects related to Definiton:
Institutions that will set the targets: The Government and the CBRT,
inflation is the common target.
Relationship between inflation targeting and other policy goals:
maintaining financial stability is a supportive goal.
Targeting period; long-term, but achieving success in 2002 is vital for
early credibility.
Choosing a target index; CPI as an easily understandable index, but
also observing core indices and using them in policy appraisals,
The CBRT’s responsibilities; making use of the necessary tools in
reaching the target, flexibility in absorbing external shocks,
пѓј Importance of inflation forecasts; delayed effect of monetary policy.
пѓј The role of long-term objectives; exerting influence on expectations.
18
Monetary Policy Strategy – Inflation Targeting
Broadly speaking, inflation targeting system is a
component of institutional development in the economy.
Under floating exchange rate regime, the success of
inflation targeting system depends on the stability achieved
by minimum intervention of the Central Bank on one
hand, and the weakening of pass-through between
exchange rate and inflation. As can be seen in the Graph,
the pass-through has weakened significantly after
switching to floating exchange rate.
19
Inflation Targeting; Interaction Between Exchange
Rate and Inflation
Pass-through between Exchange Rate Movements and CPI
�1994 Crisis
0.42
Russian
General
Elections
Crisis
0.40
0.38
0.36
2000
Stabilization
Program
Switch to
Floating
Exchange
Rate
0.34
0.32
0.30
1994
Stand-by
Program
Political
Uncertainties
0.28
01-89
07-89
01-90
07-90
01-91
07-91
01-92
07-92
01-93
07-93
01-94
07-94
01-95
07-95
01-96
07-96
01-97
07-97
01-98
07-98
01-99
07-99
01-00
07-00
01-01
07-01
01-02
0.26
20
Monetary Policy Strategy – Inflation Targeting
Other factors for the success of inflation targeting:
пѓјFiscal responsibility,
пѓјFinancial deepening,
пѓјEliminating
backward-looking
mechanisms in the economy,
indexation
пѓјFlexibility in goods and factor markets to allow smooth
adjustment to relative price changes.
21
Monetary Policy Regimes in Developing Countries
In recent years, implementation of inflation targeting system has increased in
developing countries.
100%
% 8,3
% 20
% 34,8
80%
% 29,2
% 29,2
60%
% 41,7
40%
% 80
% 65,2
% 58,3
20%
% 20,8
0%
1985
Fixed Exchange
1990
Managed Peg
% 4,2
% 8,3
1995
2000
Free Floating
Inflation Targeting
22
Monetary Policy Strategy – Inflation Targeting
Experience of IT in Developing Countries;
Inflation has declined in all developing countries.
IT has helped authorities to shape inflation expectations and to fight against
inflation shocks.
Rigidity in inflation has been gradually reduced.
Pass-through between the past inflation and current inflation has diminished,
and forward-looking expectations have begun exerting influence on the
current inflation.
It has been tested against adverse shocks; for example: the 1997 Asian
Crisis, Australia, Chile, Israel and New Zealand in the 2000 Oil Shock.
There still exist some risks limiting discretionary power (supply-side shocks),
an inflation-growth dilemma could arise. However, the Sacrifice Ratios in
developing countries implementing IT have declined. In other words, the
sacrificed economic growth in return for a decline in inflation and
fluctuations in output growth have diminished.
Under the floating exchange rate regime, exchange rate movements have
gradually lost their importance for the central banks.
23
Monetary Policy Strategy – Inflation Targeting
Significant Progress has been made to satisfy the preconditions for the IT:
The Central Bank Law has been amended to ensure instrument independence,
accountability and transparency; the CBRT enjoys full control over its credits.
Borrowing Law will bring about discipline and transparency in the public sector, will
facilitate the adaptation of fiscal policy to inflation targeting.
The technical capabilities at the CBRT bank have been improved in line with
the requirements of the inflation targeting framework:
пѓј Forecasting and policy analysis models;
• We are obtaining technical support from international institutions and central
banks.
• Short- and long-term forecasting models; We are conducting works on
statistical modelling based on leading indicators, time-series modelling,
narrowly-defined structural dynamic modelling, judgement modelling and
general equilibrium modelling.
пѓј Improving statistical database;
• Inflation Expectation Survey for industrial and financial sectors
• Daily retail prices analysis by using sampling method
24
Monetary Policy Strategy – Inflation Targeting
Risks in Developing Countries:
пѓј Expectations might deteriorate, and the cost of bringing inflation
down might not be reduced, if structural reforms are not
realized as planned.
пѓј Inflationary rigidity in housing (rent), education and health
sectors;
пѓј The habit of backward-looking indexation,
пѓј The need for achieving banking rehabilitation, enhancing
competitiveness, and developing resistance to external shocks in
order that monetary policy transmission mechanism may
function effectively and timely.
пѓј Harmony between fiscal policy and monetary policy.
25
MACROECONOMIC CONDITION
AND EXPECTATIONS
26
Stability Indicators in the Economy
Fx Operations
1000
Volatility of Exchange Rate
(TL/USD, Coefficient of Variation)
1700000
1600000
800
5%
1500000
07.02
06.02
05.02
04.02
7.26
7.12
6.28
6.14
5.31
5.3
5.17
4.5
4.19
3.8
3.22
2.8
2.21
1.28
TRL / USD (Weekly Average, Offer)
03.02
0%
02.02
1000000
03.01
Selling (Weekly , Mio USD)"
1.11
12.28
12.14
11.30
11.2
11.16
10.5
10.19
9.7
9.21
8.24
8.10
7.27
7.13
6.29
6.1
6.15
5.4
5.18
-200
01.02
1%
12.01
1100000
11.01
0
10.01
2%
09.01
1200000
200
08.01
3%
07.01
1300000
06.01
4%
05.01
1400000
400
04.01
600
* (+) Indicate FX selling to the market.
The CBRT’s Fx interventions have declined.
105
1100
95
1000
O/N Repo, Simple, Left
SE Bills - Bond, Compound, Right
07-02
06-02
05-02
04-02
03-02
500
02-02
7.12
6.12
6.27
5.28
4.28
5.13
3.29
4.13
3.14
2.12
2.27
1.28
12.29
1.13
11.29
12.14
11.14
10.15
10.30
9.15
9.30
8.31
8.1
8.16
7.17
7.2
45
600
01-02
55
700
12-01
65
800
11-01
75
900
10-01
85
Turkish Eurobond Spreadleri (bps)
09-01
Interest Rates
08-01
74
71
68
65
62
59
56
53
50
Volatility of exchange rates is increased in June due to
uncertainties.
Spread =Difference betwenn Turkish Eurobonds and US Treasury Bond
Source: JP Morgan
Declining interest rates started to rise in May.
Same tendency has been observed in Turkish
eurobond interest rates.
27
Stability Indicators in the Economy
44500
FX Deposits / Total Deposits
42000
39500
42 bio
37000
USD
34500
38 bio
FX Deposits (Bio USD), right
07.02
06.02
05.02
04.02
03.02
02.02
01.02
12.01
11.01
10.01
09.01
08.01
07.01
06.01
05.01
04.01
03.01
02.01
01.01
12.00
11.00
10.00
09.00
08.00
07.00
06.00
05.00
04.00
03.00
02.00
USD
01.00
FX Deposits / Total Deposits (percentage), left
Declining dollarization tendency has started to rise again.
10000
Funds
( A & B Type, end of month , trillion TL)
8000
6000
4000
0 7 .0 2
0 6 .0 2
0 5 .0 2
0 4 .0 2
0 3 .0 2
0 2 .0 2
0 1 .0 2
1 2 .0 1
1 1 .0 1
1 0 .0 1
0 9 .0 1
0 8 .0 1
0 7 .0 1
0 6 .0 1
0 5 .0 1
0 4 .0 1
0 3 .0 1
2000
0 2 .0 1
65
60
55
50
45
40
35
30
28
32000
Price Stability and Growth
In the last 30 years, the average growth rates in Turkey have decreased and
become instable.
1970-1979
1980-1989
1990-2001
GNP Growth
- Average
4.8
4.0
3.2
-Std. Deviation
3.2
3.5
5.9
- Average
24.1
49.6
74.8
-Std Deviaton
15.7
26.7
21.9
CPI
By decades, the average inflation in 1970-79 period was 24 percent, while the
growth rate was 4.8 percent. In 1990-2001 period, inflation rose up to 75 percent,
while the growth rate declined 3.2 percent. In addition, the standard deviaiton,
which shows irregularity in growth rose from 3.2 percent to 5.9 percent.
The main reason is the high inflation environment.
29
Price Stability and Growth
Under the uncertainty created by inflation;
пѓј The economic agents face difficulties in making medium-term investment
and consumption decisions.
пѓј Risk and real interest rates in the economy will increase.
пѓј Maturities in all markets will shorten due to high risk perception.
пѓј Price mechanism cannot function correctly and cannot transfer information.
пѓј Confidence may be lost in economic policies, and governments cannot
implement extensive and long range economic programs.
 Economy’s competitive edge weakens in internastional markets, making it
difficult to access capital markets.
пѓј Income distribution worsens.
пѓј Backward-looking indexation mechanism gets rooted.
30
CPI
Average CPI by Country Groups
180
180
160
160
140
140
120
120
100
100
Western Hemisphere
Eastern Europe
80
80
Turkey
60
60
40
40
20
0
20
Developing Asia
Advanced Countries
1983-1992
0
1993-2002
2001
Yeras
World Economic
Outlook, IMF
31
Price Stability and Growth
Why did it happen so? We were not clear on our priorities, we
lost time.
Fighting inflation cannot be given up to another priority, such as
growth, employment or exports. It should be kept in mind that a
low and stable inflation is sine qua non for all these issues.
There is no other choice but to beat inflation.
We know from our last 25 years of experience that a sustainable
growth, employment and export performance cannot be
achieved unless this problem is solved.
32
Price Stability and Growth
Today
In general, governments aim at growth and employment while central banks aim at
price stability.
In this context, today the targeted inflation in the program is the common goal of the
Government and the Central Bank.
The Central Bank will support the government policies provided that they do not
endanger price stability.
Price stability is the most important objective. To this end, tight fiscal and monetary
policies have been implemented since the beginning.
Why? Because sustainable growth can only be achieved if price stability is assured.
If we deviate from our primary objective as before, we could not reach anything. No
price stability, no sustainable growth. Real interest rates will soar in this case.
On the other hand, the main source of growth is the increase in productivity.
Therefore, emphasis must be given to policies boosting productivity of the public
and private sector in order to achieve a sound growth in the medium-term.
33
Stability Indicators in the Economy
Growth
In 2002, GNP is projected to increase by 3 percent. Developments in the first six months
indicate that this target could be met despite political uncertainties. “Growth” will no
longer be sacrificed.
In agricultural sector, the growth rate of value added is expected to be around 5 percent in
2002 thanks to favorable weather conditions.
Production in manufacturing industry has increased by 8.3 percent in January-May period.
Capacity utilization ratio in June heralds a high increase in output. Also imports figures
denote a spur in output. Production increase in sectors sensitive to foreign demand has been
determinant in this regard.
Political uncertainty that occured in the second half of May caused interest rates and
exchange rate to rise. Output and demand may somewhat be affected negatively.
Growth expectations for 2002 have rached 2.5 percent since the New Year. However, it is
probable that growth expectations may be influenced adversely due to uncertainties.
34
Stability Indicators in the Economy
Business sentiment compared to the previous month
(optimistic-pessimistic, percentage)
50
30
10
-10
-30
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
01-00
11-99
09-99
07-99
05-99
03-99
01-99
-50
-70
Private Manufacturing Industry Capacity Utilization Ratio,
(de-seasonalized, percentage)
80
78
76
74
72
70
68
66
64
62
Mevsimsellikten arД±ndД±rД±lmД±Еџ seri
Г–zgГјn seri
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
01-00
60
35
Stability Indicators in the Economy
Total Industrial Output
(original series & de-seasonalized series index values)
120
110
100
90
80
Original Series
05-02
04-02
03-02
02-02
01-02
12-01
11-01
10-01
09-01
08-01
07-01
06-01
05-01
04-01
03-01
02-01
01-01
12-00
11-00
10-00
09-00
08-00
07-00
06-00
05-00
04-00
03-00
02-00
01-00
70
de-seasonalized series index values
36
Stability Indicators in the Economy
Growth Indicators (*)
Volume of Goods Sold to Domestic Market
40.0
Output Volume
40.0
30.0
30.0
20.0
20.0
10.0
0.0
10.0
-10.0
0.0
-20.0
-10.0
-30.0
-20.0
-40.0
Finished Goods Inventory
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
03-00
-30.0
-50.0
Orders Taken from Domestic Market
40.0
0.0
30.0
-2.0
20.0
-4.0
10.0
-6.0
0.0
-10.0
-8.0
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
-40.0
07-00
-12.0
05-00
-30.0
03-00
-10.0
03-00
-20.0
*Values reflect the difference between the optimist and pessimist views for the next 3 months.
37
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
40
20
0
-20
-40
-60
11-00
Sales Revenues
Exports Prospects
40
30
20
10
0
-10
-20
38
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
Next three month (expectations)
09-00
-45
05-00
-30
07-00
-15
03-00
Total Employment
05-00
01-00
0
03-00
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
01-00
15
01-00
05-02
03-02
01-02
11-01
09-01
07-01
Last three month
05-01
03-01
01-01
11-00
09-00
07-00
05-00
03-00
01-00
Stability Indicators in the Economy
Growth Indicators
Investment Expenditure Tendency
10
-10
-30
-50
-70
-90
Stability Indicators in the Economy
Balance of Payments
Current Account
(Billions of USD)
6
3.3
1
-4
-1.4
-9
The economic slowdown and the
depreciation of the Turkish lira have led
to a noticeable turnaround in the external
current account in 2001, with a surplus of
US$ 3.3 billion from a deficit of US$ 9.8
billion in 2000.
-9.8
-14
2000
2001
2002 T ahmini
A current account deficit of US$ 1.4
billion is projected for 2002.
Capital Account
(Billions of USD)
12
8
4
0
-4
-8
-12
-16
-20
12.9
6.6
-3.9
2000
2001
2002 T ahmini
Net capital inflow, which was US$ 12.9
billion in 2000, has turned to net capital
outflow of US$ –3.9 billion after the
February Crisis.
Capital inflows are projected to be
US$ 6.6 billion in 2002.
*Included IMF Credit
39
Stability Indicators in the Economy
Balance of Payments
Current Account (January-April)
(Millions of USD)
400
Running a surplus of USD 176 Millions
in the period January-April 2001, Current
Account has run a deficit of USD 665
Millions in the same period this year.
176
200
0
-200
-400
-600
Year-end deficit figure;
-665
-800
2001
2002
Current Account – Cumulative 12 Months
(Millions of USD)
6000
- Besides improvements in the economies of
EU countries, and increasing tourism
revenues, it will materialized depending on
the rise in imports.
4000
2000
0
-2000
-1420
-4000
-6000
-8000
11-02
09-02
07-02
05-02
03-02
01-02
11-01
09-01
07-01
05-01
03-01
-10000
40
The CBRT’s quantitative targets are on track
Monetary Base
(TL Trillion)
(TL Trillion)
Realization
6000
Celling (2)
4000
Celling (2)
April
June
September
December
Net International Reserves
(USD Million)(1)
Feb
April
June
Sept
(1)
Defined as Net International Reserves of
CBRT minus (i) Treasury liabilities to the IMF
(ii) Treasury fx denominated borrowing with
an original maturity of less than one year.
(2)
Based on the average of the stocks
prevailing during the five working days
including and immediately preceding each of
these dates.
(3)
Calculated by using the four working day
average of Feb. 11-12 and March 11-12, to
take account of the transitory impact of the
Bayram religious holiday on currency
demand.
Dec
-1000
-3000
Realization
Floor
-5000
-7000
-9000
-11000
-6500
-7200
-7800
-8500
-9700
Se
p
February(3)
Fe
b
0
ru
a
ry
(3
)
2000
Realization
r
8000
33300
31300
em
be
9089
28739
D
ec
8900
8250
27700
be
r
10000
26100
tem
10600
35000
30000
25000
20000
15000
10000
5000
0
Ju
ne
10850
A
pr
il
12000
Net Domestic Assets
41
Price Developments in January-June 2002
In this period, WPI increased by 12.5 percent, while CPI increased by 12.0.
These developments indicate that the end-year target for CPI, which is 35
percent, could be reached.
Inflation, which realized higher than expected in January, started to decline
rapidly in February-March period. Inflation expectations also turned to
positive after February. In other words, February was a turning point for
both inflation and expectations.
In the February-May period, some monthly price increases were the
lowest in the last 15 years.
42
Price Developments in January-June 2002
Main factors determining price developments in the first 5
months were;
1.
Positive expectations created by confidence in the program,
and stability achieved in the money and foreign exchange
markets,
2.
Nominal appreciation of TL,
Bringing domestic demand under control by pursuing tight
fiscal and monetary policies,
3.
4.
Increase in agricultural output with favorable weather
conditions after March and decrease in food prices beyond
seasonal effects.
43
Price Developments
CPI (percentage)
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
12.0
10.0
8.0
6.0
4.0
2.0
Annual Change, left
04-02
01-02
10-01
07-01
04-01
01-01
10-00
07-00
04-00
01-00
10-99
07-99
04-99
01-99
0.0
Monthly Change, right
44
Price Developments in January-June 2002
Uncertainties that occured in the second half of May put interest rates and
exchange rate in an upward trend, exerting a cost-oriented pressure over prices.
Thus, manufacturing industry prices that have increased between 0.6 and 2
percent in the first 5 months period rose by 3.5 percent in June. Determining
factors were price increases in petrolium and chemical products as well as in the
metal sector. Moreover, price adjustments in the public sector manufacturing
industry have been observed.
Similar development has been observed in consumer prices. De-seasonalized
consumer prices in June realized 1 point above the May figure.
This situation has negatively affected the short-term inflation expectations of
economic agents. However, there has been no significant change in the inflation
expectations for the next 12 months period.
Increments in public sector prices have already been made. The downward trend
in inflation will resume if the program is strictly implemented and stability is
achieved in exchange rate.
45
Inflation expectations are rapidly converging to the
target.
End-year Inflation Expectations
(Consumer Prices)
75.0
70.0
65.0
Effect of New
Economic Program
60.0
55.0
50.0
45.0
35,6
2002 Target
40.0
Credibility
gap
35,0
Tem-2
Tem-1
Haz-2
Haz-1
May-2
May-1
Nis-2
Nis-1
Mar-2
Mar-1
Ећub-2
Ећub-1
Oca-2
Oca-1
Ara-2
Ara-1
Kas-2
Kas-1
Eki-2
Eyl-2
Eyl-1
AДџu-2
AДџu-1
30.0
Eki-1
35.0
For the first time in 25 years, the inflation expectations of public opinion are
the same as the Government and the Central Bank.
46
The medium-term program is steering the inflation
expectations for 2003 towards the target.
Inflation Expectations for the Next 12 Months
(Consumer Prices)
54
50
46
42
38
34
30
% 32,6
Reel Sector
Tem-2
Tem-1
Haz-2
Haz-1
May-2
May-1
Nis-2
Nis-1
Mar-2
Mar-1
Ећub-2
Ећub-1
Oca-2
Oca-1
Ara-2
Ara-1
Kas-2
Kas-1
Eki-2
Eki-1
Eyl-2
Eyl-1
AДџu-2
AДџu-1
% 31,5
Financial Sector
47
Price Movements in the Future
Price stability:
Medium-term inflation
targets:
пѓј A pre-condition for a rapid,
equitable and sustainable growth,
пѓј The primary objective of
the monetary policy
пѓј2002 пѓ % 35
пѓј2003 пѓ % 20
пѓј2004 пѓ % 12
пѓј2005-.... пѓ Single digits
48
Price Movements in the Future
Risks:
пѓј Relaxation: Price stability will not be achieved by meeting the
target of 35 percent for 2002. There still much to be done.
More confidence must be built up for reducing inflation even
further.
пѓј Transformation of short-term political uncertainty into a longterm one and instability in FX and TL markets,
пѓј Continuation of backward-looking indexation and price setting
habits (especially in education, health, housing sectors).
пѓј Pricing and taxing policies in line with public sector borrowing
requirements,
пѓј Non-productive considerations in incomes policy,
пѓј International oil prices and external shocks such as rapid increases
in energy prices.
49
An Overview of the FX Policy
General Evaluation:
Real exchange rates are determined in the short- and medium-term
according to the following factors;
The existence of different kinds of market players; players who act
with economic rationale, technical analysts, speculators (noise traders)
Structural reforms,
Domestic and international political developments,
Global shocks,
Expectations on current account balance and capital movements
Public sector debt stock; risk premium
Public visibility of the economy
In the long-term;
economic fundamentals; terms of trade, productivity (BSE), fiscal
policy,
50
An Overview of the FX Policy
General Evaluation:
The level of exchange rate is the result of all policies:
- Structural reforms, discipline in public finances and external support
will boost TL, perception of political uncertainty and concerns over the
continuation of the program will cause TL to depreciate.
Exchange rate policy actions are announced by press releases on every
occasion. Exchange rate developments will be evaluated within the context
of the target inflation.
Exchange rate cannot be regulated according to the wishes of any sector:
Banks, companies, short position, domestic and foreign trade
A stability area based on economic fundamentals will be created when
inflation, real and nominal interest rates fall down and especially when a
yield curve for TL emerges.
51
An Overview of the FX Policy
Moreover, competitive edge of a country cannot be
determined by solely real exchange rate. Factors that
determine competitive edge;
пѓј
пѓј
Price Competition:
Real exchange rates, Relative Position, Unit Wages
Qualitative Factors:
пѓј
Service after Sale, Standardization in product
Structural Elements:
Macroeconomic Performance, Economic and Social
Development Level, Productivity, Qualified Manpower,
Research – Development Studies
52
TURKEY’S POSITION IN GLOBAL COMPETITION
60
54
50
44
40
42
(75)
40
40
36
Ranking
(49)
40
(59)
(59)
(53)
29
30
(48)
(53)
21
21
(22)
(22)
1992
1993
(41)
20
10
0
1994
1995
1996
1997
1998
1999
2000
2001
Years
() indicate total number of countires, Above figures indicate the Turkey’s ranking
Sources: World Economic Forum, Global Competitiveness Report, Overall Ranking
53
An Overview of the FX Policy
Operational Arrangements:
In order to improve the functioning of the foreign exchange market, policy actions will focus
on the following areas:
пѓј Development of forward and futures exchange markets, which will allow exporters and
importers to hedge against exchange rate uncertainty;
пѓј Clarification of the taxation and accounting procedures of the futures contracts;
пЃ± A multi-agency working group chaired by the CBT
пЃ± Remote access problem is temporarily solved by the ISE
In order to improve transparency in the FX market, the CBRT will gradually end its practice
of acting as a blind broker:
пѓј Forex / interest rate risk;
пѓј Counterparty risk.
54
An Overview of the FX Policy
With the decline in interest rates, the CBT is in a stronger position to sterilize the
liquidity engendered by the use of Treasury’s FX receipts for domestic payments
via money market operations.
Further improvements
in BOP
Reverse currency
substitution
Excess FX
liquidity will be
mopped up through
transparent, rulebased mechanisms.
Market
confidence
FX reserves
Enable Turkey
to better
withstand
external shocks
Political uncertainty has compelled us to postpone fx buying auctions for some
time.
Exchange rate is to be intervened, only if there is excess volatility.
Intervention might also be done through warnings or announcements.
55
An Overview of the FX Policy
Determining the Indicative Exchange rates
Effective from 1 April 2002, the CBRT;
пѓјBetween 10.30-15.30
at 1 hour intervals
пѓјtakes the average
value of the averages of
the buying and selling
rates as quoted by
banks in the interbank
FX markets for 1 USD.
пѓјthe arithmetic average
of the 6 averages is
taken to determine the
CBT’s indicative FX
selling rate of 1 USD to
be announced at 15.30.
56
An Overview of the TL Policy
THE TL DEPOSIT BUYING AUCTIONS
In order to enhance the effectiveness of its sterilization efforts, the CBRT launched a
standard 4 week maturity TL deposit buying auction for a limited amount, and in a
way not to affect the liquidity level of the system substantially starting from 1 April
2002.
THE INTRA-DAY REPO TENDERS
In case a temporary liquidity shortage begins to develop;
пѓј the CBRT will inject liquidity into the system through the open market operations
overnightly.
OTHER MARKET ARRANGEMENTS
Starting from 19 June 2002, banks under the recapitalization program may utilize one-
week repo facility in the open market operations in order to meet their short-term
liquidity needs.
57
An Overview of the TL Policy
OTHER MARKET ARRANGEMENTS
•
Starting gradually from 1 July 2002, the CBRT will have ended its “blind broker”
function in the TL markets by 2 December 2002.
•
The CBRT will carry out late liquidity window operations in the interbank money
market consistent with its function as the lender of last resort.
OTHER ARRANGEMENTS
o
Starting from 1 August 2002, Banks Association of Turkey has initiated the
practice of Turkish Lira Reference Interest Rate (TRLIBOR).
o
The practice of “Primary Dealership” will be reintroduced shortly by the
Treasury to boost efficiency of debt management and to increase secondary
market liquidities of government papers. The Central Bank is providing necessary
support in this regard.
58
Policy actions concerning required reserves and
liquidity requirement
In order to provide more flexibility to the liquidity management, to bring to
stability in financial markets, and to reduce the funding costs of financial
institutions, the following measures have been taken without changing the
required reserves ratio and liquidity requirement ratio;
пѓј
Vault cash in TL and in FX are excluded from liquid assets,
пѓјCalculation, maintenance and reporting periods are determined to be
once in a two weeks,
пѓј3 percentage points of reserve requirement rates for TL and FX are
also permitted to be maintained as two-week averages.
пѓјAll of the required reserves shall be remunerated.
59
Conclusion
Despite volatilities caused by recent political turmoils, prudent
fiscal and monetary policies along with deep-seated structural
reform measures included in Turkey’s Medium-term Economic
Program will lay the foundations of an economy that is:
пѓј
пѓј
пѓј
пѓј
пѓј
пѓј
well-placed on the high road of sustained non-inflationary
growth;
more resilient to adverse shocks;
less vulnerable to crises;
more equitable in income distribution;
more conducive to foreign and domestic investment;
as a consequence, better positioned to integrate into the
European Union.
60
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