The Role of Central Banks in the New Global Economic Design

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1 The Role of Central Banks in the New Global Economic Design Murat Çetinkaya Deputy Governor December 12, 2012 Doha, Qatar

2 Contents I. Monetary Policy: Responses Against Challenges II. Turkish Monetary Policy A. The New Framework B. Supportive Fundamentals C. Accomplishments III. Concluding Remarks 2

3 MONETARY POLICY: RESPONSES AGAINST CHALLENGES 3

4 While ACs central banks pumping liquidity Policy Rates in Advanced Economies (%) Liabilities of Major Central Banks (% of GDP) Source: Bloomberg Source: Bloomberg 4

5 global stress increases the capital flow volatility. Capital Inflows to Emerging Markets (Billion USD) Risk Appetite VIX Index Source: EPFR, Bloomberg. Source: Bloomberg. 5

6 Central Bank s Role I. Price Stability (Safeguard) II. Financial Stability (Contribute to) 6

7 Price Stability Academic work estimates a growth cost of 0.25 percentage points for every 10 percentage points rise in inflation*. * Barro, Robert J. (1995). "Inflation and Economic Growth." NBER Working Paper Series, No:

8 Financial Stability Rapid credit growth is a leading indicator of financial crises*. * Reinhart, Carmen M., and Kenneth S. Rogoff. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton Press.; Taylor, A. (2012). The Great Leveraging, NBER Working Papers, No

9 Financial Stability and Central Banks: The Debate Micro vs. Macroprudential tools in financial regulation The «lean vs. clean» : When should CBs act? A joint optimization problem: Using monetary and regulatory policies in concert to pursue price and financial stability Should Central Banks be primary institution responsible for financial stability? Coordinated approach Unified approach 9

10 Challenges Ahead for Emerging Markets Controlling inflation in the age of volatility Managing unstable financial markets Treading uncharted waters in monetary policy 10

11 Two Approaches Approach 1: Use capital flow measures to restrict inflows while tightening via interest rates (Brazil, South Korea) Approach 2: Use macro-prudential measures to restrict domestic credit and domestic demand (Turkey) 11

12 Macroprudential Toolkit Contercyclical capital buffers Systemic levy for leveraged financial institutions Limits to the LTV ratios on bank lending Better resolution regimes for SIFIs Surcharges on capital requirements for SIFIs 12

13 Non-Interest Policy Tools 13

14 New Framework for Central Banking Incorporating financial stability without diluting the pricestability objective Lean against the wind using a combination of monetary tools Close coordination with other responsible agencies Better communication and greater clarity Coordination between central banks 14

15 TURKISH MONETARY POLICY: THE NEW FRAMEWORK 15

16 CBRT Monetary Policy Framework INSTRUMENTS KEY INDICATORS OBJECTIVES CREDIT POLICY Reserve Requirement Reserve Option Mechanism PRICE STABILITY INTEREST RATE POLICY Weekly Repo Rate Expectations (Primary Objective) LIQUIDITY POLICY TL Liquidity Management Interest Rate Corridor OMO and Effective Funding Rate Credit Growth FINANCIAL STABILITY FX Liquidity Management Reserve Option Coefficient 16

17 A Monetary Policy Instrument: Interest Corridor Interest Rate Corridor and Average Funding Rate (Percent) QE2 RR Hikes Eurozone Debt Crisis Lehman Crisis Adoption of 1-week repo rate as the policy rate O/N Lending - Borrowing Interest Rate Corridor 1-week Repo Rate ISE O/N Rate (10-day MA) Average Funding Rate Source: ISE, CBRT. 17

18 Reserve Requirements Source: CBRT. 18

19 A Macroprudential Instrument: Reserve Options Mechanism The banks are allowed to deposit FX or Gold instead of their Turkish lira reserve requirements. 19

20 Reserve Options Mechanism (FX) Reserve Option Coefficients (ROC) ROC Percent of Required Reserves in FX 20

21 Reserve Options Mechanism (Gold) ROC Reserve Option Coefficients (ROC) Percent of Required Reserves in Gold 21

22 Other Macroprudential Measures Restrictions on FX lending June 2009 Loan to value ceilings December 2010 High risk weights for consumer loans June 2011 Increased provisions for consumer loans June 2011 Limit to credit card payments June 2011 Interest rate risk August 2011 Changes to minimum capital adequacy requirements September 2011 Changes to deposit insurance premiums September

23 TURKISH MONETARY POLICY: SUPPORTIVE FUNDAMENTALS 23

24 Fiscal dominance continues to decline Public Debt Stock (% of GDP) Source: Treasury, CBRT *Medium-Term-Program forecasts ( ) 24

25 with significant improvement in its composition. Currency Composition (%) Average Maturity of Domestic Borrowing** (month) Source: Treasury, CBRT *August 2012 Source: Treasury *August 2012 **Flow data 25

26 While real sector liabilities are low Household Liabilities (% of GDP) Corporate Liabilities (% of GDP) Poland Hungary UK Germany Finland Germany Turkey France Greece Sweden Austria Italy Denmark Ireland The Netherlands Portugal Spain Source: ECB, CBRT. Source: ECB, CBRT. 26

27 housing loans do not pose a risk. Housing (Mortgage) Loans (% of GDP) Source: ECB, CBRT. 27

28 Banking sector capital base presents a healthy outlook. Capital Adequacy Ratio (as of 2011 Q4, %) Financial Soundness of the Banking Sector (%) Source: FSI - IMF, CBRT. Source: CBRT. 28

29 as well as the NPL ratios. NPL Ratios (as of 2011 Q4, %) Financial Soundness of the Banking Sector (%) Source: FSI - IMF, CBRT. *

30 TURKISH MONETARY POLICY: ACCOMPLISHMENTS 30

31 New Borrowing (Change in Total Debt)/GDP (Percent) Policy Induced Soft Landing Global Stimulus avg. %14 credit growth Source: CBRT. Last Observation: 2012 Q2 31

32 Total Loans Total Loan Growth Rates (YoY Change, Percent) Total Loan Growth %14 credit growth 5 0 Source: BRSA. Total credit is inclusive of all types of banks (deposit banks, participation banks, and development/investment banks) and credit cards. 32

33 Rebalancing Current Account Deficit (12-Month Rolling, Billion USD) Source: CBRT. Latest Observations: September

34 FX Volatility Implied Volatility (12-Month, Countries with CAD) Source: Bloomberg, CBRT. Countries with a current account deficit: Poland, Brazil, Chile, South Africa, Indonesia, Columbia, Mexico, Czech Rep., Romania and Turkey. 34

35 FX Reserves (Gold included) Million USD Source: CBRT 35

36 Anchored Inflation Expectations % Inflation Expectations and Realizations (Annual CPI) Source: TurkStat, CBRT. *CBRT Survey of Expectations. 36

37 CONCLUDING REMARKS 37

38 Concluding Remarks Challenges are still ahead and Central Banks roles are redefined with this new financial design. The cost of preventing a financial crisis is much less compared to living it. Use of macroprudential instruments is quite helpful in preventing crises and dealing with short term capital flows. Turkey responded to the changing dynamics. CBRT introduced a policy mix of counter-cyclical fiscal and monetary policies. 38

39 The Role of Central Banks in the New Global Economic Design Murat Çetinkaya Deputy Governor December 12, 2012 Doha, Qatar

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