Yılmaz held a press conference in Ankara on Thursday to share the basics of the monetary policy the central bank will pursue in 2010 and to convey his remarks on numerous actual developments in the domestic and global economy. He argued that although the Turkish government is continuing talks with the IMF over a stand-by deal, the bank is indifferent to any possible outcome of the negotiations while determining its policies for the period in sight. The governor, however, argued that interest rates may come under pressure if the Treasury raises borrowing without the government signing a deal with the IMF.
He was very optimistic regarding domestic economy recovery scenarios addressing the global economic crisis. “The possibility that light shining at the end of the tunnel is sunlight is increasing,” Yılmaz said. He had previously noted that light was visible ahead, but that it was not certain whether it was the tunnel exit or an approaching train. He asserted that he sees growth resuming in the final quarter of 2009.
Data flow from Turkey, specifically the country’s third-quarter gross domestic product (GDP), which showed a less-than-expected contraction of 3.3 percent, shows that economic recovery has begun, Yılmaz said. Signals coming in since May 2009 have not been clear to guide the bank’s interest rate policy, he added.
No change in monetary policy
In very simple words, the governor underlined that there will be no alteration to the basic pillars of the current monetary policy, which are inflation targeting and a floating exchange rate regime. He was decisive to express that exchange rates are neither a policy instrument nor a target under the current regime. Although he repeated his commitment to stay away from any dramatic intervention in the exchange rate mechanism, the governor said the precautionary foreign exchange purchase tenders will continue in 2010 as long as current liquidity conditions prevail. Yılmaz said that the bank has purchased a net amount of $64.7 billion worth of foreign exchange from the markets since 2002 to stem the harsh consequences of sharp volatility in currency rates.
For him, the increases in the monetary base, the quantities of trade in the exchange rate markets and the amount of loans extended to Turkey in the event of a stand-by deal with the IMF will be the major conditions determining the level of liquidity in Turkey, he noted.
Turkey’s central bank governor said the bank had planned to buy TL 8 billion ($5.3 billion) of domestic government debt in 2010, a maximum TL 5 billion of which would be bought in the first half. Yılmaz also commented on Fitch’s recent decision to upgrade Turkey’s rating by two notches upwards to BB+, saying this was a belated move and that the rating agencies should have done this much earlier.
He was happy to report that the Turkish Central Bank took action swiftly to stem adversities coming about as a result of the economic crisis. “We were among the central banks in the world that started interest rate reductions immediately at the dawn of the crisis,” he said.
Turkey slashed interest rates more than any other country, cutting them 1,025 basis points since the eruption of the crisis in mid 2008.
Yılmaz also expressed his predictions regarding the course of the inflation rate for 2010. The inflation will likely increase in a volatile pattern in the first half of 2010 but, starting from the second half, it will again start falling in a gradual and decisive way, he claimed. The uncertainty interval will continue to be plus and minus 2 percent for the next three years, he said and added that the annual inflation target for 2012 will be 5 percent.
Yılmaz further said the bank may reduce the reserve requirement ratio for banks if there are liquidity shortages along with extra measures whenever deemed necessary. The bank’s fundamental instrument to conduct monetary policy is and will remain short-term interest rates, he added.
Thanks to the relatively stronger structure of the domestic banking system and the strong position of its financial system, Turkey managed to bring the inflation rate to single-digit levels at the peak of the global crisis, Yılmaz told the press and acknowledged that this is indeed a significant opportunity to render the environment of low inflation and interest rates permanent. The commitment to discipline while conducting fiscal policies in the medium term is especially important regarding this crucial issue, the governor said.
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