The Central Bank announced its monetary and exchange rate policy for 2020!

CBRT announced the ‘Monetary and Exchange Rate Policy for 2020’ report. In 2020, the Monetary Policy Committee will hold 12 meetings a year within a pre-announced calendar.

The details of the Central Bank’s report are as follows:

  1. The CBRT’s main objective is to achieve price stability. The CBRT uses all available instruments in line with its primary objective of price stability. Monetary policy decisions are formulated by taking into account inflation expectations, pricing behavior and developments in all other factors affecting inflation. The CBRT will act with a data-driven approach that takes into account all macroeconomic indicators, particularly inflation and economic activity, while continuing to safeguard financial stability, which is complementary to price stability.
  2. The inflation target has been maintained at 5 percent, in line with the agreement reached with the government. Monetary policy will be designed to gradually bring inflation closer to this target. In periods when inflation deviates significantly from the targets, the inflation forecasts published by the CBRT in the Inflation Reports serve as interim targets. Therefore, inflation forecasts in the short term and inflation targets in the medium term are the values that are envisaged to guide economic agents on the future course of inflation. In the October 2019 Inflation Report, the disinflation path aims to bring inflation down first to single digits and then gradually decline and stabilize around 5%.
  3. As in previous years, the uncertainty band around the inflation target was kept at 2 percentage points in both directions around the target. Comprehensive assessments of inflation developments during the year will be shared with the public through the Inflation Report. In case the realized inflation at the end of the year falls outside the uncertainty band, an “Open Letter” will be written to the Government in line with the principle of accountability.
  4. The floating exchange rate regime will continue. Under the current exchange rate regime, the exchange rate is not used as a policy instrument. Economic fundamentals, monetary and fiscal policies, international developments and expectations are the main determinants of foreign exchange supply and demand. The CBRT does not have any nominal or real exchange rate target. However, the CBRT will not remain indifferent and will react appropriately with the tools at its disposal in the event that the exchange rate becomes significantly detached from economic fundamentals and exchange rate movements permanently affect price stability or pose risks to financial stability. The CBRT will continue to closely monitor exchange rate developments and any related risk factors, take the necessary measures and utilize the relevant tools on the basis of effective utilization of CBRT reserves in order to ensure the effective functioning of foreign exchange markets.
  5. In 2019, the CBRT determined its monetary stance by taking into account the indicators for the underlying trend of inflation, and set the level of monetary tightness in a way to ensure the sustainability of disinflation and its alignment with the targeted path. The CBRT’s inflation forecasts and their underlying trends play an important role in the decision-making process. In the first half of 2019, the CBRT kept the one-week repo auction rate unchanged at 24 percent, while the liquidity
    management of inflation. As a result of the tight monetary policy stance and strong policy coordination, the waning cumulative exchange rate effects and the mild course of domestic demand led to a significant improvement in inflation dynamics. The CBRT gradually lowered the policy rate to 14 percent in July, September and October in response to the improvement in the inflation outlook.
  6. In 2019, the CBRT continued to expand and utilize its toolkit of instruments other than the policy rate to support the effective functioning of markets and the transmission mechanism against volatility and unhealthy price formations in financial markets.
    . In this context, in the last week of March, in order to limit the adverse effects of the imbalance between supply and demand in the international swap market on swap rates, the CBRT’s Turkish Lira Currency Swap Market continued to utilize the total outstanding swaps (foreign exchange purchased by the CBRT on the spot and matured at maturity).
    The amount of FX swap transactions was gradually increased to 40 percent of the transaction limits of the Foreign Exchange and Banknotes Markets.
  7. As of May, the Borsa Istanbul (BIST) Swap Market started to conduct transactions in US dollar and euro with maturities longer than one week in line with monetary policy interest rates. Moreover, in August, the CBRT decided to conduct Turkish lira currency swap transactions against foreign exchange, which had been conducted via the quotation method and with a maturity of one week, via the traditional auction (multiple price) method and with maturities of one, three and six months.
  8. On 17 June 2019, the CBRT resumed the practice of providing liquidity facilities to Primary Dealer (PD) banks within the framework of Open Market Operations (OMO) to support the Primary Dealing System, taking into account its contribution to deepening financial markets and enhancing the effectiveness of the monetary policy transmission mechanism. The interest rate applied to this liquidity facility, which is provided by the CBRT through overnight repo transactions and within the limit, was set 100 basis points below the policy rate.
  9. Developments throughout 2019 led banks to make intensive use of the CBRT swap facilities. Accordingly, most of the system’s funding need was met through CBRT-sided swap facilities, which led to a gradual decline in OMO funding. In 2019, OMO funding was mostly realized through one-week repo auctions; however, taking into account the developments in financial markets, the
    The CBRT suspended weekly repo auctions twice. In both periods when weekly repo auctions were suspended, all CBRT funding was provided through the overnight lending rate and BIST overnight repo rates converged to the upper band of the CBRT interest rate corridor. The share of liquidity provided to banks under the PM facility in the system’s funding requirement remained limited.
  10. In this period, the CBRT continued to take various steps to bring domestic gold savings into the financial system. The existence of an effective gold swap market is crucial for a healthy domestic gold market. In this context, the CBRT opened the Gold Swap Market against Turkish Lira in May 2019 and the Gold Swap Market against Foreign Exchange in October 2019, contributing to banks’ liquidity management. Transactions in both markets are carried out within the limits granted to banks.
  11. The CBRT made some changes to ensure more flexible and effective use of reserve requirements as a macroprudential tool to support financial stability. In July 2019, with the amendment to the Law No. 1211 on the Central Bank of the Republic of Turkey, it became possible to base reserve requirements not only on banks’ liabilities, but also on items deemed appropriate on and off the balance sheet. In this framework, in August, it was decided to use reserve requirements more flexibly and effectively as a macroprudential tool to support financial stability. Accordingly, Turkish lira reserve requirement ratios and the interest/interest rate to be paid to Turkish lira-denominated reserve requirements were linked to the annual growth rates of banks’ total Turkish lira-denominated standard and closely monitored cash loans excluding FX-indexed loans and loans extended to banks.
  12. In 2020, the Monetary Policy Committee (MPC) will hold 12 meetings a year according to a pre-announced schedule3 . In addition, the first three meeting dates for 2021 are also announced in the calendar 4 . The monetary policy decision and its brief rationale, together with an English translation, will be published on the CBRT website at 2:00 p.m. on the same day as the meeting, and the summary of the meeting, including the detailed assessments of the Committee, will be published on the CBRT website within five business days following the meeting.
  13. In the upcoming period, communication policy will be used effectively as a supportive tool. The main communication tools of monetary policy are the Committee announcements and the Inflation Report. The Inflation Report will continue to be published four times a year and monetary policy implementations will continue to be introduced through informational meetings to communicate effectively with the public. Moreover, decisions regarding Turkish lira and foreign exchange liquidity management will continue to be shared with the public.
  14. Ensuring price stability and financial stability permanently is of great importance for social welfare and potential growth. In this framework, communicating the importance of achieving price stability to the public will be one of the main priorities of the communication policy and communication channels will be utilized at the highest level. In this context, meetings with investors, analysts and economists with a technical content will continue to be held on a regular schedule. Communication with the press, academia and the general public, which are important target groups of CBRT communication, will be maintained effectively. The Governor’s presentations and speeches on the CBRT’s activities, monetary policy implementations and period-specific economic debates at the Planning and Budget Committee of the Grand National Assembly of Turkey and other platforms will also play an important role in informing the public.
  15. The Financial Stability Report will continue to be another important communication tool of the CBRT. In addition, the Monthly Price Developments Report, working papers, economic notes and blog posts published by the CBRT, and conferences organized by the CBRT will also form part of the communication policy. As in previous years, the CBRT will continue to use platforms such as social media and the Economics for All microsite, and organize meetings, seminars and events.
  16. The CBRT attaches great importance to diversifying and enriching the information set used to formulate the monetary policy framework. Data enabling close analysis of micro-level dynamics and field information as well as high-frequency data on the financial sector are used extensively in this process. In this framework, meetings with real and financial sector representatives will continue in the upcoming period to strengthen the communication network.
  17. Despite the recent significant improvement in inflation dynamics, Turkey’s inflation rate is still high compared to peer countries. The cautious monetary policy stance needs to be maintained in order to make the decline in inflation permanent. A sustained disinflation process is crucial for lowering the country risk premium and long-term interest rates. The CBRT aims to bring inflation down to single digits first and then to the ultimate target of 5 percent.
  18. While a decisive stance in monetary policy is a prerequisite for price stability, our experience in the fight against inflation has shown that monetary policy alone is not sufficient to achieve price stability. Social consensus and a joint effort are crucial in the fight against inflation. Therefore, a holistic effort involving all stakeholders is needed. In addition to an appropriate monetary and fiscal stance, structural factors that delay or hinder disinflation should be addressed.
    It is important to reduce rigidities. Continued structural reforms to reduce inflation rigidities and volatility will contribute significantly to price stability and social welfare.
  19. In order to achieve price stability and steer the economy towards a balanced and sustainable growth path, it is essential to maintain fiscal discipline in fiscal policy. Maintaining fiscal discipline has been one of the main factors reducing the sensitivity of the Turkish economy to external shocks. In the current conjuncture of high global uncertainties, it is important to preserve these gains and take them further. A central bank, which by law focuses on price stability, has to closely monitor budget and fiscal policy developments and react to their impact on inflation when necessary. Therefore, fiscal policy developments will continue to be closely monitored in the upcoming period in terms of their impact on the inflation outlook.
  20. The funding requirement of the system, which was TL 93.1 billion as of end-2018, increased by approximately TL 18.6 billion throughout the year and reached TL 111.7 billion as of December 4, 2019. In this period, the funding requirement of the system was mainly driven by monetary base developments, FX sales to energy-importing state-owned enterprises and public sector operations, and export and FX-earning services rediscount credits.
    The decline in reserve requirement ratios, on the other hand, had a dampening effect.
  21. While a significant portion of the system’s funding requirement was met through TL against FX swap transactions conducted at the CBRT and BIST, a limited amount of funding was provided through the Gold Swap Market against TL at the CBRT, and the net funding provided through the OMO amounted to TL 29.5 billion. The CBRT-sided swap facilities provide banks with flexibility in managing exchange rate risk and liquidity management, and enhance the effectiveness of the monetary policy transmission mechanism by contributing to reducing the supply-demand imbalance that may arise in the swap market and keeping market rates in line with policy rates.
  22. In 2019, the CBRT provided funding through one-week repo auctions and the PM liquidity facility under the OMO. Banks continued to utilize the possibility of converting repo transactions into deposit transactions. In this period, overnight repo rates at the BIST Repo-Reverse Repo Market hovered around the one-week repo auction rate, which is the policy rate. On the other hand, taking into account the developments in financial markets, on March 22 and 9�
    With the announcements made on May 2019, one-week repo auctions were suspended for a short period of time.
  23. Pursuant to the provisions of the CBRT’s “Communiqué Amending the Communiqué on Reserve Requirements” dated December 22, 2018, all repo transactions conducted at the BIST were exempted from reserve requirements in order to contribute to the deepening and efficiency of financial markets. This eliminated the need for the Interbank Repo-Reverse Repo Market, where banks could trade with each other and only on behalf of their portfolios, and where the fund provider could conduct repo transactions without being subject to reserve requirements. In this context, it became possible to merge the repo markets and BIST closed the Interbank Repo-Reverse Repo Market as of December 28, 2018.
  24. As a result of the joint efforts carried out by the Ministry of Treasury and Finance, the CBRT, the Banks Association of Turkey, the Capital Markets Association of Turkey, Istanbul Clearing, Settlement and Custody Bank Inc. and BIST to establish a short-term Turkish lira reference interest rate with a high trading volume that can be used as an underlying asset or benchmark in debt market instruments, financial derivatives and various financial contracts, BIST started to calculate and publish the Turkish Lira Overnight Reference Interest Rate (TLREF) as of June 17, 2019. Recently, bond issues based on TLREF have been realized, while derivative products such as forward interest rate contracts and swap transactions based on TLREF are being created.
  25. In order to increase flexibility in the collateral management of the banking sector, in January 2019, the discount rates of Government Domestic Debt Securities (GDS) accepted as collateral against Turkish lira transactions and lease certificates issued domestically by Sukuk issued by the Central Securities Depository (Sukuk) were revised from 5% for all maturities by considering maturity differentiation. Accordingly, the discount rates for securities with less than 2 years to maturity, securities with maturities between 2 and 5 years and securities with maturities longer than 5 years were set as 1%, 2% and 3%, respectively.
  26. In the Committed Transactions Market at BIST, where lease certificates with Turkish lira payments issued by asset leasing companies established by the Ministry of Treasury and Finance and publicly-owned institutions are traded, the CBRT started to conduct overnight repo transactions on December 17, 2018 and reverse repo transactions on May 27, 2019.
  27. Banks’ use of the CBRT’s Turkish Lira Currency Swap facility, which was launched in November 2018, remained limited at first. However, following the developments in the foreign swap market in March 2019, banks’ use of this facility increased rapidly. Accordingly, the total amount of outstanding swap transactions in this market was gradually increased from 10 percent to 40 percent of the transaction limits of the Foreign Exchange and Banknotes Markets.
  28. In the first three months of 2019, auctions of FX Deposits against Turkish Lira Deposits continued and banks were provided with a maximum of USD 2.5 billion of FX liquidity. However, developments in foreign markets in March 2019 led to an increase in the amount of Turkish lira funding demanded by banks from the CBRT, and auctions of FX Deposits against Turkish Lira Deposits were suspended as no longer needed.
  29. Following the decision taken at the G20 Summit in 2009 to include over-the-counter derivatives transactions in the organized market and electronic platform transaction processes, the Swap Market was launched at BIST in October 2018 to enable swap transactions, most of which are conducted in the over-the-counter market, to be conducted in the organized market by including them in the central clearing and settlement process. This market contributes to financial stability by increasing the efficiency of the monetary transmission mechanism and reducing the systemic liquidity risk for banks. In this market, the CBRT also conducts transactions in US dollar and euro currencies with maturities longer than one week in line with the monetary policy interest rates. As of December 4, 2019, the amount of CBRT-sided swap transactions in the BIST Swap Market was USD 13.3 billion.
  30. In order to contribute to banks’ liquidity management, as of August 5, 2019, the CBRT decided to conduct Turkish lira currency swap transactions against foreign exchange with a maturity of 1 week via the quotation method as well as with maturities of 1, 3 and 6 months via the traditional auction (multiple price) method. Upon the commencement of Turkish lira swap transactions against foreign exchange via the traditional auction method, the total limit for outstanding swap transactions at the Turkish lira swap market was reduced to 20% of the transaction limits of the Foreign Exchange and Banknotes Markets on August 6, 2019, and a transaction limit of 20% was set for transactions to be conducted via the auction method. There is no transaction limit on a bank basis for transactions conducted through the auction method. In 2019, three auctions with 1-month and 3-month maturities totaling USD 2.75 billion were held via the auction method, and the interest rates in these auctions were in line with market interest rates. As of December 4, 2019, the amount of stock in the Turkish Lira Currency Swap Market via the quotation method was USD 306 million and there was no stock arising from swap transactions conducted via the traditional auction method.
  31. On the other hand, in order to increase the efficiency of banks’ liquidity management and to contribute to the inclusion of gold savings in the financial system, the CBRT opened the Turkish Lira Gold Swap Market for purchases in May and the Gold Swap Market for Foreign Exchange for purchases and sales in October. These transactions are realized by quotation with banks with a one-week maturity. The total amount of gold swaps outstanding in both markets was set at 100 tons and these amounts were distributed to banks in proportion to their transaction limits in the Foreign Exchange and Banknotes Markets. As of December 4, 2019, the stock amount in the Turkish Lira Gold Swap market was 13.7 tons. The stock amount in the FX Gold Swap market was 25.9 tons on the buy side and there were no transactions on the sell side. In addition, transactions in the Gold against Foreign Exchange Market and the purchase of gold produced from ore against Turkish lira continued in this period. These markets also contribute to the formation of a healthy domestic gold market.
  32. In order to contribute to the effective functioning of FX markets, the CBRT continued to conduct TL-settled forward FX transactions on the Futures and Options Market (VIOP) operating at BIST in 2019, which started on August 31, 2018, depending on market conditions.
  33. While no FX sales were made through auctions or direct sales in FX markets in 2019, the CBRT met the FX demand of energy-importing state-owned enterprises amounting to USD 5.84 billion in 2019.
  34. Banks have a total limit of approximately USD 50 billion to purchase FX deposits with 1-week and 1-month maturities from the CBRT. In addition, banks can bring FX collateral deposits with 1-week, 2-week and 1-month maturities to the CBRT within the limits allocated to them. In line with the developments in reference interest rates abroad, the US dollar FX deposit buying rate was gradually lowered from 2.25 percent to 1.50 percent for all maturities, the 1-week FX deposit selling rate was gradually lowered from 4.25 percent to 3.50 percent and the 1-month FX deposit selling rate was gradually lowered from 5.00 percent to 4.25 percent.
  35. Reserve requirements and the ROM are other important instruments affecting FX reserves and FX liquidity. The reduction in the Turkish lira reserve requirement ratios in February, the lowering of the upper limit of the ROM FX facility in May and the reduction in the TL reserve requirement ratios of banks with credit growth among the reference values in August provided about USD 8.1 billion of FX liquidity to the financial system under the ROM. On the other hand, in May,
    In August and September, approximately USD 11.4 billion of liquidity was withdrawn from the market with the increases in foreign exchange reserve requirement ratios.
  36. The interest rate paid to US dollar-denominated required reserves, reserve options and FX deposit accounts held at the CBRT was reduced by 100 basis points each in August and September to 0 percent, while the commission rate (0 percent) applied to euro-denominated FX account balances held in blocked required reserves and FX deposit accounts at the CBRT remained unchanged.
  37. Within the framework of Article 45 of the CBRT Law, rediscount credits extended in TL to exporters and firms engaged in foreign currency-earning services and activities through the Export Credit Bank of Turkey (Turk Eximbank) and commercial banks by rediscounting bills issued in foreign currency continued to be the instrument that contributed the most to the CBRT’s FX reserves in 2019 with the feature of being repaid in foreign currency at maturity. Providing low-cost financing to firms through these credits supports the increase in exports of goods and services. The steady increase in the number of firms using these credits and the continued spread of credit to the general public contribute to the stabilization of foreign trade. Moreover, diversification of export markets and export of high value-added products are encouraged by offering longer-term rediscount credits for exports to new markets and exports of high-tech products.
  38. The reference interest rates applied to rediscount credits by the Bank remained unchanged in 2019, with 1-month LIBOR/EURIBOR applied to rediscount credits with maturities up to 120 days and 6-month LIBOR/EURIBOR applied to credits with maturities between 121 and 360 days.
  39. By the end of 2019, rediscount credit utilization is expected to be around USD 25.4 billion and the contribution of rediscount credits to the CBRT’s FX reserves is projected to be around USD 22.5 billion. Currently, rediscount credits repayments have contributed USD 20.5 billion to CBRT reserves.
  40. The level and composition of reserves may fluctuate periodically due to the CBRT’s monetary and exchange rate policy instruments. In this period, changes in the ROM implementation, which is among the facilities provided by the CBRT to banks, and FX sales to energy-importing state-owned enterprises had a downward impact on reserves, while rediscount credit repayments, increases in FX reserve requirement ratios and banks’ use of CBRT swap facilities had an upward impact on reserves.
  41. While the weak course of global economic activity and downside risks to inflation have become more evident, monetary policies of central banks in advanced economies have been shaped in an expansionary direction. This supports the demand for emerging market financial assets and risk appetite. However, trade protectionism and other uncertainties regarding global economic policies have the potential to affect the Turkish economy through both capital flows and foreign trade channels. In this context, concerns over global growth and trade wars as well as volatility in the risk appetite for emerging market assets stand out among the upside risk factors for 2020. In 2020, the CBRT will continue to use the policy tools at its disposal in the most effective manner in line with the objective of achieving price stability. In order to contribute to banks’ TL and FX liquidity management, the CBRT will continue to play a stabilizing role and support financial stability in line with market conditions as in 2019. Moreover, the CBRT will continue its policy of increasing reserves as long as market conditions permit.
  42. In 2020, one-week repo auctions will continue to be used as the main policy instrument. Accordingly, in Turkish lira liquidity management;
  • When determining the daily repo auction amount, the average of overnight interest rates in the secondary market should be around the one-week repo auction rate, which is the policy rate,
  • Effective and stable operation of money markets in line with the liquidity management strategy,
  • The instruments used support the effectiveness of monetary policy,
  • Ensuring the uninterrupted operation of payment systems,
  • It will be aimed to ensure that the operational structure has sufficient flexibility against extraordinary developments in the markets. In order to achieve these objectives and enhance the effectiveness of monetary policy, the level of liquidity in the market and the distribution of liquidity within the system will be taken into account when determining the general framework of liquidity management.
  1. In order to ensure a balanced distribution of liquidity across the days of the week, the CBRT may continue to hold multiple repo auctions with different maturities on the days deemed necessary, provided that the maturities are between 5-12 days. On the other hand, depending on liquidity conditions, one-week repo auctions may not be held on some days.
  2. In order to maintain the diversity of instruments and operational flexibility in liquidity management, the CBRT needs to keep a sufficient amount of government securities or Turkish lira-denominated lease certificates issued by the SDSC in its OMO portfolio for technical reasons. In the upcoming period, considering the funding need of the system and developments regarding the liquidity distribution in the banking system, the operational flexibility on money market interest rates should be maintained.
    for the purpose of;
  • The nominal size of the CBRT Open Market Operations portfolio, which was set at a nominal TL 18.9 billion for 2019, was set at a maximum of 5% of the CBRT’s analytical balance sheet total assets in 2020,
  • Continue to carry out direct purchases to achieve this target, including the nominal TL 5.2 billion maturing in 2020,
  • Direct purchases will be carried out in a balanced and predictable framework throughout the year, taking into account the redemption profile of the CBRT’s open market portfolio, liquidity conditions in the market and the domestic borrowing program of the Ministry of Treasury and Finance, and the securities to be purchased directly will be announced through data distribution firms at 10:00 a.m. on the first business day of the month of purchase,
  • Purchase auctions to be held on Mondays, Wednesdays and/or Fridays with a value date one business day later,
  • The maximum nominal amount of each auction is TL 150 million,
  • In other matters related to tenders, it is planned that the current regulations will apply and any changes can be made when necessary.

45. In 2020, the CBRT will continue to use reserve requirements effectively and flexibly as a supportive and fine-tuning tool for the short-term interest rate policy, which is the main monetary policy instrument.

FX Liquidity Management Framework in 2020

  1. Banks will continue to be provided with one-week and one-month maturity FX liquidity facilities at the FX Deposit Market at the CBRT with a total limit of approximately USD 50 billion.
  2. Banks will be able to bring FX or gold deposits with one-week, two-week and one-month maturities to the CBRT within the limits allocated to them.
  3. The Ministry of Treasury and Finance and the CBRT will directly meet the foreign exchange needs of energy-importing state-owned enterprises. In this context, the extent to which the demands will be met will continue to be decided within the framework of market conditions.
  4. Turkish Lira Currency Swap Market transactions and CBRT-sided transactions at the BIST Swap Market will continue in 2020. In addition, Turkish Lira Currency Swap Auctions may also be held if needed according to market conditions. Foreign Exchange Deposits against Turkish Lira Deposits auctions may be held again if needed.
  5. In order to support banks’ liquidity management, the CBRT will continue to conduct Turkish Lira and FX Gold Swap Market transactions, purchase and sale of gold against FX and purchase of gold against Turkish Lira in 2020.
  6. Depending on market conditions, Turkish lira-settled forward foreign exchange transactions at the BIST VIOP may continue.
  7. In case of unhealthy price formations in exchange rates as a result of speculative behavior due to loss of market depth and excessive volatility, the CBRT may intervene in the market through flexible auctions or directly.
  8. In order to strengthen the monetary policy transmission mechanism and support financial stability, the CBRT may continue to gradually reduce the ROM facility provided to banks in 2020.
  9. In 2020, the foreign exchange equivalent currency transactions between the CBRT and banks authorized to conduct transactions in the FX markets will continue.
  10. In 2020, as in the past, the CBRT will continue to closely monitor FX supply and demand developments and take necessary measures to ensure the sound functioning of the FX market and balance FX liquidity.
  11. The CBRT will continue to increase its reserves in 2020, provided that market conditions are favorable. Accordingly, rediscount credit utilization in 2020 is projected to be around USD 28 billion, and the contribution of rediscount credits to the CBRT’s FX reserves is expected to be around USD 26 billion.