CENTRAL BANK OF TURKEY Interbank Markets Operations. Eşref Mehmet GÖKSU Markets Department Manager of FX Department

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1 CENTRAL BANK OF TURKEY Interbank Markets Operations Eşref Mehmet GÖKSU Markets Department Manager of FX Department September

2 Legislative Framework 2

3 Legislative Framework The Law on The Central Bank of the Republic of Turkey (Law No. 1211) Article 4 : Fundamental duties and powers The primary objective of the Bank shall be to achieve and maintain price stability. The Bank shall determine on its own discretion the monetary policy that it shall implement and the monetary policy instruments that it is going to use in order to achieve and maintain price stability. The Bank shall, provided that it shall not be in confliction with the objective of achieving and maintaining price stability, support the growth and employment policies of the Government. 3

4 Legislative Framework Article 4/I-b: to take necessary measures in order to protect the domestic and international value of Turkish Lira and to establish the exchange rate regime in determining the parity of Turkish Lira against gold and foreign currencies jointly with the Government; to execute spot and forward purchase and sale of foreign exchange and banknotes, foreign exchange swaps and other derivatives transactions in order to determine the value of Turkish Lira against foreign currencies, Article 4/I-c: to determine the procedures and conditions of reserve requirements and liquidity requirement by taking into consideration the liabilities of banks and other financial institutions to be deemed appropriate by the Bank, Article 4/I-g: to take precautions for enhancing the stability in the financial system and to take regulatory measures with respect to money and foreign exchange markets, Article 4/II-b: The Bank shall determine the inflation target together with the Government and shall in compliance with the said target adopt the monetary policy. The Bank shall be the ultimate body authorized and responsible to implement the monetary policy. Article 4/II-e : The Bank shall, as the lender of last resort, carry out the operations of extending credits to banks, 4

5 Legislative Framework Article 56: The Bank shall not, grant advance and extend credit to the Treasury and to public establishments and institutions, and shall not purchase debt instruments issued by the Treasury and public establishments and institutions in the primary market. The Bank shall not extend credits and grant advances except for the operations authorized by this Law, and the credit to be extended and the advance to be granted shall not be unsecured or without cover, and in any manner whatsoever the Bank shall not, be a guarantor or provide security other than its own direct transactions. 5

6 Operational Framework 6

7 Operational Framework In line with its primary objective of achieving and maintaining price stability, the Central Bank carries out monetary policy implementations within the framework of the inflation-targeting regime. Besides, the Central Bank, as stipulated in its law, fulfills its duty to take measures to achieve stability in the financial system. The Central Bank s main policy instrument to achieve price stability is the repo auction rate with one-week maturity. Besides, when deemed necessary, required reserve ratios and liquidity management can be used as supplementary instruments to enhance the efficiency of monetary policy and to contain macro financial risks. 7

8 Open Market Operations CBT has five types of instruments for the implementation of OMOs. 1. Outright Purchases 2. Outright Sales 3. Repurchase Agreement (Repo) Tenders 4. Reverse Repo 5. Liquidity bills 8

9 Open Market Operations The CBT injects liquidity into the market through repo tenders. In case of a liquidity shortage, The Central Bank announces the amount of repo auction at 10:00 a.m. and holds at 11:00 a.m. CBT does not announce an auction on days that there is no funding need. Auctions are held at the interest rate set for one week repo auctions by the Monetary Policy Committee via the quantity auction method. According to the law, repo and reverse repo maturity cannot exceed 91 days. CBT is also an active participant of Istanbul Stock Exchange (ISE) Repo market. CBT absorbs excess liquidity by bidding at CBRT O/N borrowing interest rate. PD (Primary Dealer) banks can also obtain O/N liquidity by using their daily borrowing limits at a rate lower than the CBT lending rate till 4:00 p.m. In case of unforeseen excessive liquidity shortage during the day, which may exert excessive pressure on money market interest rates, the Central Bank may announce one-week maturity Intra-day Repo Auctions via quantity auction method in addition to the regular ones announced at 11:00 a.m. Other auctions held by the Central Bank at open market operations are held in traditional auction method. 9

10 Open Market Operations Standing Facilities: CBT has three types of standing facilities. 1. Marginal lending facility 2. Deposit facility 3. Late overnight liquidity window (LON) facility 10

11 Open Market Operations Standing Facilities: Marginal Lending Facility: Counterparties can use the marginal lending facility to obtain liquidity against eligible assets. The interest rate for this facility is the CBT s O/N lending rate. Deposit Facility: Counterparties can use the deposit facility to make deposits with the central bank. This facility is another way of absorbing excess liquidity from the market. The interest rate for this facility is the CBT s O/N borrowing rate. Late Overnight Liquidity Window Facility: Counterparties can use this facility at an interest rate set currently 300 bp above the central bank s O/N lending rate. Borrowing rate is 0. LON facility is activated after the marginal lending facility closes at 4:00 p.m. The closing time for LON is 5:00 p.m. 11

12 CBRT Rates CBRT Rates as of 5 August 2011 CBRT O/N Lending 300 bp bp 100 bp 225 bp 75 bp CBRT O/N Borrowing 500 bp 8.00 PD Repo 5.75 Policy Rate :00 11:00 15:00 16:00 17: Hours Interbank+OMO LON 12

13 CBRT Rates CBRT Rates before 5 August 2011 CBRT O/N Lending 300 bp bp 100 bp 175 bp 8.00 PD Repo 6.25 Policy Rate 475 bp CBRT O/N Borrowing :00 11:00 15:00 16:00 17: Hours Interbank+OMO LON 13

14 Billion TL Liquidity Level Week Repo 3 Month Repo Interbank Overnight ISE Overnight Net OMO

15 Interest Rates % CBRT Borrowing Rate ISE Repo-Reverse Repo CBRT Policy Rate PD Repo O/N Swap %

16 Exchange Rate Policy Along with inflation targeting, the Central Bank implements the floating exchange rate regime. Under the current exchange rate regime, the foreign exchange rate is not used as a policy tool and the Central Bank of Turkey does not have a nominal or real exchange rate target. The foreign exchange rate is determined by supply and demand conditions in the market. Operations of the CBRT in FX Market 1) Auctions 2) Direct Interventions 3) Foreign Exchange Deposit Markets 16

17 Exchange Rate Policy Even if they implement a floating exchange rate regime, a strong foreign exchange reserve position is very important for emerging economies like Turkey to curb the unfavorable effects of potential internal and external shocks and to boost confidence in the country. Therefore, the Central Bank holds foreign exchange buying auctions to build up reserves at times where foreign exchange supply increases relative to foreign exchange demand. 17

18 Exchange Rate Policy Being meticulous to keep the impact on supply and demand conditions in the foreign exchange market at minimum level, the Central Bank has been buying foreign exchange via transparent foreign exchange buying auctions with preannounced terms and conditions. Although the aim is to conduct auctions according to the pre-announced program, auction programs may be changed with prior notice in the event of unexpected significant developments related to the foreign exchange supply beyond forecasts. In this framework; i. It was stated in the annual monetary and exchange rate policy announcement for 2010 that the CBT will continue to hold foreign exchange buying auctions at a maximum daily amount of USD 60 million, with USD 30 million of auction amount and USD 30 million of optional selling amount. 18

19 Exchange Rate Policy ii. However, as the capital flows to Turkey have grown more stable, the CBT, in order to accelerate the foreign exchange reserve accumulation, decided to increase the maximum daily amount to be purchased in auctions to USD 80 million, with USD 40 million of auction amount and USD 40 million of optional selling amount, starting from 3 August iii. Later on, taking into consideration that there may be abrupt changes in the outlook of global financial markets and the risk appetite, which may in turn cause significant fluctuations in capital flows towards emerging countries, including Turkey, the CBT started to implement a more flexible method in foreign exchange buying auctions. With this change, it is aimed to benefit from capital inflows more effectively with a view to strengthening foreign exchange reserves and to enhancing resilience against volatile capital flows. 19

20 Exchange Rate Policy CBRT has continued accumulating foreign exchange reserves by purchasing USD 50 million daily, starting from 1 January Taking into account the slowdown in capital flows, the daily amount to be purchased in auctions was decreased from USD 50 million to USD 40 million on 31 May 2011 and to USD 30 million on 29 June CBRT suspended the foreign exchange buying auctions on 25 July

21 Exchange Rate Policy In case of unhealthy price formations due to a decrease in the depth of the foreign exchange market, foreign exchange selling auctions are held under the basic principles of the floating exchange rate regime. Starting from 5 August 2011, the Central Bank of the Republic of Turkey (CBRT) decided to provide foreign exchange liquidity to the market, through foreign exchange selling auctions on the days deemed necessary. On the days when the CBRT decides to sell foreign exchange, based on daily market developments, the selling amount is announced at 11:00 a.m. In addition, the Central Bank may also directly intervene in the market through purchase or sale, in case of any unhealthy price formations in exchange rates due to speculative behavior stemming from a decrease in market depth. 21

22 FX Operations of CBRT Since 2002 Year Buying Auctions Selling Auctions Buying Interventions Selling Interventons Net Buyings of CBRT , , , , , , , , , ,296 1,000 5,441 2,105 6, , , , , , , , , * 6, ,550 Total 65,410 3,900 25,534 2,126 84,918 *As of

23 Depreciation Appreciation TRY and EM Currencies Announcement of QE2 by the FED TRY EM Average *Average of EM countries: Brazil, Chile, Czech Rep. Hungary, Mexico, Poland, S.Africa, Indonesia, South Korea and Colombia. Source: CBT and Bloomberg

24 FX Reserves of CBT (billion USD) * *As of

25 Foreign Exchange Deposit Markets The Central Bank used to act as intermediary in various foreign exchange transactions performed among authorized banks. The foreign exchange deposit market was one of the markets where the Central Bank executed its intermediary functions. The Central Bank s gradual phasing out of its intermediary functions in the Foreign Exchange and Banknotes Markets foreign exchange deposit market that started in July 2002 was completed as of December 2, Due to problems in global credit markets in October 2008, Central Bank resumed its activities as an intermediary in the foreign exchange deposit markets in a view to contributing to the enhancement of the mobilization of foreign exchange liquidity in the Interbank Foreign Exchange Market. In this context, banks shall be able to borrow and lend in the foreign exchange deposit market through the intermediation of the Central Bank. 25

26 Foreign Exchange Deposit Markets The Central Bank gradually increased the transaction limits of banks in the Foreign Exchange Deposit Market to USD 10.8 billion. Moreover, the maturity of foreign exchange deposits borrowed within the predetermined borrowing limits by the banks from the Foreign Exchange Deposit Markets was extended from 1 week to 1 month, and the borrowing rate for transactions where the Central Bank is a counterparty was reduced from 10.0 percent to 7.0 percent for USDollar, and 9.0 percent for Euro. In February 2009, the maturity of the foreign exchange deposits have been extended from a maximum of 1 month to 3 months and the foreign exchange deposit rate, for transactions in which the Central Bank is a counterparty, was reduced to 5.5 percent for US Dollar and to 6.5 percent for Euro. 26

27 Foreign Exchange Deposit Markets The intermediary functioning of the CBRT in the Foreign Exchange Deposit Market was suspended as of 15 October Even though the intermediary functioning of the CBRT in the foreign exchange deposit market was over, the banks are still able to borrow foreign exchange deposits from the CBRT within their limits. However, the maturity of the said transactions are again one week, as was the case before October CBRT decided to reduce the lending rate for transactions, which the Central Bank is a party to, from 5.5 percent to 4.5 percent for US Dollar and from 6.5 percent to 5.5 percent for Euro effective as of 9 August

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