The Central Bank of the Republic of Turkey (CBRT) published 8 “Boxes” within the scope of the first Inflation Report of the year, in which current issues are comprehensively evaluated at a high level of detail.
In box 1.1 titled “An Evaluation on Quantitative Tightening Steps”, it is reminded that the CBRT started the monetary tightening process in the second half of 2023 in order to establish disinflation as soon as possible, anchor inflation expectations and control the deterioration in pricing behavior.
In the analysis, it was stated that TL liquidity developments were closely monitored for the level of monetary tightness required for the permanent establishment of price stability and monetary transmission was strengthened with quantitative tightening decisions. It was stated that the liquidity steps taken by the CBRT in the recent period aimed to increase the effectiveness of the monetary transmission mechanism.
In the analysis, it was stated that there was a TL liquidity surplus in the system in some periods starting from the second half of 2023 due to Exchange Rate Protected Deposit exchange rate difference payments and foreign exchange transactions against TL, and the CBRT became a net borrower in Open Market Operations. The following information was given:
“The CBRT has many policy tools to sterilize the liquidity that may occur in the market. As a matter of fact, the excess liquidity has been sterilized with various tools to increase the effectiveness of the monetary transmission mechanism. In this context, the required reserve ratio increases within the scope of quantitative tightening in July, September and November 2023 will be removed from the system. A total of 1 trillion lira has been sterilized. The funding need of the system, which was 926 billion lira in mid-July 2023 before the increase in required reserve ratios, reached 1,269 trillion lira as of December 21, 2023.
Following the quantitative tightening steps taken regarding reserve requirements, the CBRT started to organize TL warehouse purchase auctions by increasing the variety of sterilization tools used to strengthen the monetary transmission mechanism, following the announcement made on December 21, 2023. The CBRT continued the quantitative tightening process with the regulations it made regarding the reserve requirement application within the scope of its announcement dated January 30, 2024. “The net effect of the change in practice, which was made by reducing the required reserve ratios for exchange rate-protected accounts and increasing the additional required reserve ratio in TL for foreign currency accounts, was a tightening of 125.8 billion liras.”
TL WAREHOUSE PURCHASE TENDERS
In the analysis, as of December 22, 2023, the CBRT has sterilized the excess liquidity in the system with 1 and 2-week TL warehouse purchasing auctions organized outside the overnight maturity, and as the temporary excess liquidity in the system has decreased since this date, the amount withdrawn through warehouse auctions has also decreased to 25%. It was reported that it reached 32 billion lira as of January 2024.
In the analysis reported that the withdrawal of excess liquidity through TL warehouse purchase auctions caused the overnight sterilization amount to gradually decline, the overnight futures transaction volumes of the BIST Repo-Reverse Repo Market, where the indicative overnight repo rates are formed, remained at reasonable levels as the CBRT’s overnight sterilization amount decreased to reasonable levels. It was stated that this way the effective functioning of money markets is supported.
In the analysis, it was noted that the weighted average interest rates in warehouse purchase auctions were formed at levels close to the CBRT policy rate. “The reduction of the overnight sterilization amount made through Open Market Operations to reasonable levels had positive reflections on the BIST repo market transaction volumes, as well as an improvement in the transfer of the CBRT monetary policy stance to overnight interest rates. The warehouse auctions held “As a result of the forward withdrawal of excess liquidity, BIST Repo-Reverse Repo Market overnight repo interest rates remained close to the CBRT policy rate.”
CBRT publishes the Inflation Report, which is its main communication tool, every 3 months within the framework of a pre-announced calendar every year. In the Inflation Report, in addition to the CBRT’s medium-term forecasts and inflation forecasts, general macroeconomic developments are comprehensively discussed and a general evaluation of the factors affecting inflation is made. The Inflation Report also includes “boxes” containing comprehensive analyzes examining current issues.