Download CENTRAL BANK OF THE REPUBLIC OF TURKEY

CENTRAL BANK OF THE
REPUBLIC OF TURKEY
The Challenges of Balancing Hot Money Inflows vs
Conducting a Prudent Monetary Policy
Dr. Đbrahim Turhan
Deputy Governor
5 May 2011
1
Presentation Outline
I.
Monetary Policy in Advanced Economies vs
Emerging Economies
II.
The Turkish Economy
III.
Monetary Policy Response:Turkey’s Experience
IV. Financial Stability Outcomes So Far
2
I. Monetary Policy in Advanced
Economies vs Emerging
Economies
3
Growth Differentials
Growth Rates
(annual change)
10
8
6
4
2
0
-2
Advanced Countries
-4
Emerging Countries
-6
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011
Source: Bloomberg, CBRT
4
Inflation Differentials
Core Inflation
(annual change)
5
Advanced Countries
4
Emerging Countries
3
2
1
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
0
Source: Bloomberg, CBRT
5
Interest Rate Differentials
Policy Rates
(percent)
12
10
Advanced Countries
Emerging Countries
8
6
4
2
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
0
Source: Central Banks, CBRT
6
Quantitative Easing
Balance Sheets of Major Central Banks
350
300
250
200
150
100
BoE
50
Jan-07
Jul-07
Jan-08
ECB
Jul-08
Jan-09
Jul-09
Fed
Jan-10
Jul-10
Jan-11
* Index: March 2007=100
Source: Central Banks
7
Result: Surge in Capital Flows
After the crisis both the magnitude and the composition of capital flows
have changed: magnitude due to exceptionally looose monetary policies
and QE in advanced economies; composition – due to risk averseness
Net Capital Flow to Emerging Countries
1,400
1,200
Other Investments
Net Portfolio Investments
Net Direct Inflows
Net Private Inflows
1,000
800
600
400
200
0
-200
2007
2008
2009
2010*
2011**
2012**
* Estimate
** Forecast
8
Result: Appreciation Pressure
USD against EM currencies *
(4 Jan 2010=1)
1.15
Announcement of QE2
by the FED
1.10
1.05
Depreciation
1.00
Appreciation
0.95
0.90
01-10
03-10
05-10
07-10
09-10
11-10
01-11
03-11
* Average of emerging market currencies including Brazil, Chile, Colombia, Czech Republic, Indonesia, Hungary, Mexico, Poland, Republic
of Korea and South Africa.
Source: Bloomberg, CBRT
9
II. The Turkish Economy
10
Turkey: (1) Commodity Importer
Impact of Energy Prices
60
50
40
35.5
30
25.2
20.9
17.6
17
20
10.5
10
0
1.6
4.4
9.1
9.9
10
10.7
11.8
12.9
12.7
12.3
13.2
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
Real Energy Imports with 2002 Prices
Price Effect
Total of Energy Imports
Source: Treasury
11
Turkey: (2) Young Population
Source: UN
12
Turkey: (3) Low Savings Rate
Gross national savings
(Percent of GDP, 2009)
60
50
40
30
20
10
0
China
India
Indonesia
Korea
Brazil
Turkey
Source: IMF WEO
13
Turkey: (4) Convergence to the EU
GDP
(2009 PPP based, current international dolar)
3.0
2.5
2.0
1.5
1.0
Austria
Greece
Sweden
Belgium
Netherlands
Poland
Turkey
Spain
Italy
France
United Kingdom
Germany
0.0
Switzerland
0.5
Source: IMF WEO
14
Challenges: (1) Surge in Capital Flows
Composition of Capital Flows
(12-month rolling sum, billion USD)
Finance of Current Account Deficit
(percentage of CAD)
120
50
Portfolio Investments+
Deposits
40
Short Term Credit + Portfolio
Investments + Deposits
100
80
FDI
30
60
40
20
20
10
0
0
-20
FDI
-40
-10
Private
Sector
Credit*
-20
-30
01-07
01-08
01-09
* After controlling for the effect of change in Decree No. 32
Source: TURKSTAT, CBRT
01-10
-60
-80
-100
01-06
01-07
01-08
01-09
01-10
Source: TURKSTAT, CBRT
15
Challenges: (2) Rapid Credit Growth
Credit Use and Current Account Deficit
9
8
14
Current Account Deficit/GDP*
12
7
10
6
5
8
4
6
3
∆ in Credit Stock/GDP (right axis)**
4
2
2
1
0
1203
0304
0604
0904
1204
0305
0605
0905
1205
0306
0606
0906
1206
0307
0607
0907
1207
0308
0608
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0
*12-months cumulative current account deficit / GDP
** Rate of annual change in credit stock / GDP
Source: BRSA, CBRT.
16
Challenges: (3) Current Account Deficit
Current Account Balance
(ratio to GDP, percent)
0
-1
-2
-2.2
-3
-4
-5
-6
-5.3
-7
-6.6
-6.8
-8
2007
2008
2009
2010
Source: TURKSTAT, CBRT
17
Challenges: (4) Weakness in External Demand
Domestic Demand and Exports
(2008 Q1=100)
Turkey’s External Demand Index*
(June 2008=100)
112
110
Global Economic Activity
Index
Domestic Demand
105
108
100
104
95
90
100
85
Turkey’s External
Demand Index
96
92
2006
Goods and Services
Exports
80
75
2007
2008
2009
2010
2011
2012
* The shares of countries within the exports of Turkey and weighted GDP data are
employed in the calculation of the external demand index of Turkey.
Source: Bloomberg, Consensus Forecasts, IMF WEO, TURKSTAT, CBRT
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2005
2006
2007
2008
2009
2010
Source: TURKSTAT, CBRT
18
Challenges: (5) Output Gap
Capacity Utilization Rate
Non-Farm Unemployment Rate
(seasonally adjusted)
85
(seasonally adjusted, percent)
22
20
80
18
75
16
70
14
65
12
Source: CBRT.
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
10
1007
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
1007
0707
0407
0107
60
Source: TURKSTAT, CBRT.
19
III. Monetary Policy Reponse:
Turkey’s Experience
20
Monetary Policy Since 2003
Accelerating
Inflation
Price
Stability
TARGET
2003-2005
Favorable Supply Shock
Decelerating
Inflation
Policy Rate
Macroprudential
Instruments
Decelerating Credit Growth
Financial
Stability
Accelerating Credit Growth
21
Monetary Policy Since 2003
2006 Q2
Adverse Supply Shock
and High Demand Shock
Accelerating
Inflation
Policy Rate
Macroprudential Instruments
Price
Stability
TARGET
Decelerating
Inflation
Decelerating Credit Growth
Financial
Stability
Accelerating Credit Growth
22
Monetary Policy Since 2003
2008 Q1
Accelerating
Inflation
Adverse Supply Shock
Policy Rate
Macroprudential Instruments
Price
Stability
TARGET
Decelerating
Inflation
Decelerating Credit Growth
Financial
Stability
Accelerating Credit Growth
23
Monetary Policy Since 2003
Accelerating
Inflation
Price
Stability
TARGET
2008 Q3-2010 Q4
Decelerating
Inflation
Global Financial Crisis
Policy Rate
Macroprudential Instruments
Decelerating Credit Growth
Financial
Stability
Accelerating Credit Growth
24
Monetary Policy Since 2003
Accelerating
Inflation
Price
Stability
TARGET
2011 Q1Current Conjuncture
Decelerating
Inflation
Policy Rate
Macroprudential
Instruments
Decelerating Credit Growth
Financial
Stability
Accelerating Credit Growth
25
Quantitative Easing vs. Quantitative Tightening
•
Quantitative easing in major economies has continued in response
to weakness in economic activity and heightened sovereign risks,
resulting in unprecedented increases in central banks’ balance
sheets.
•
Facing a significant degree of capital inflows, some emerging
economies have resorted to quantitative macroprudential
tightening, even capital flow measures.
•
Turkey has also initiated quantitative tightening via its exit strategy
in April-November 2010 (QT1) and reserve requirement hikes after
November 2010 (QT2).
26
Two Different Approaches
•
Approach 1: Use capital flow measures to restrict inflows while
tightening via interest rates (Brazil, Republic of Korea)
•
Approach 2: Use macroprudential measures to restrict domestic
credit and domestic demand while keeping the short term interest
rate differentials as low as possible (Turkey)
27
Macroprudential Measures
Measures against capital flows
Supervision/ Inspection
Measures against exchange risk
exposure
Measures against liquidity
management and credit supply
Measures against excessive rise in
asset prices
0
5
10
15
20
25
Number of countries
28
The New Policy Mix: Turkey
A lower policy rate, higher reserve requirement ratios and
a wider interest rate corridor
•
The framework we adopt is not significantly different from the conventional
inflation targeting framework.
•
The only difference is that, previously our policy instrument was the oneweek repo rate, but currently our instrument is a “policy mix”
•
We seek to use these instruments in the right combination in order to cope
with both inflation and macro-financial risks.
•
The monetary policy stance in this framework is determined not by policy
rates alone, but as a combination of all the policy instruments.
29
The Policy Rate and Interest Rate Corridor
Overnight Lending - Borrowing Interest Rate Spread
1 Week Repo Rate
25
Introduction of 1 week repo
rate as policy rate
20
15
10
5
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
0
Source: CBRT
30
Reserve Requirements as a Macroprudential Tool
Reserve Requirement Ratios
(percent)
18
Longer Than 1 Year
16
6-12 Months
14
3-6 Months
12
1-3 Months
10
Up to 1 Month
8
Demand Deposit
6
4
2
0
Nov-10
Step 1
Step 2
Step 3
Step 4
Dec-10
Jan-11
Mar-11
Apr-11
Source: CBRT
31
Reserve Requirements as a Macroprudential Tool
Reserve Requirement Ratios
(percent)
25
20.5
20.0
20
15
13.5
11.8
10.0
10
8.0
4.0
3.5
Poland
5
Russia
6.0
India
Indonesia
Peru
Turkey (FX)*
Turkey (TRY)*
Brazil
China
0
* Weighted averages
Source: Central Banks, CBRT
32
Disinflation via Quantitative Tightening
Services Prices
(year-on-year change, percent)
18
16
14
12
10
QT1
QT2
8
6
4
2
Services
0
04
05
06
07
08
09
10
11
Source: TURKSTAT, CBRT
33
Goods Prices
Goods and Services Prices
(year-on-year change, percent)
18
16
Goods
14
12
10
8
6
4
Services
2
0
04
05
06
07
08
09
10
11
Source: TURKSTAT, CBRT
34
Comparison of Inflation Rates
Inflation Rates in Turkey and around the Globe
(March 2011, percent)
10
9
8
7
6
5
4
3
2
1
Russia
Indonesia
Brazil
China
Rep.of Korea
Greece
Hungary
Poland
S. Africa
UK
Turkey
Canada
Mexico
USA
Euro Area
Germany
France
Czech R.
0
Source: Bloomberg, CBRT
35
Price Stability
Inflation and Output Gap Forecasts
Source: CBRT
36
Financial Stability: Objectives
1. Debt Ratios: Use of more equity, more prudent borrowing
2. Debt Maturities: Extending maturities of domestic and foreign
borrowing and deposits
3. FX Positions: Strengthening FX positions of public and private
sectors
4. Risk management: More effective management of all types of
risks by all agents in the economy
37
Macroprudential Tools
•
It may not always be possible to attain price stability and financial
stability together, by means of policy rates alone.
•
Solution: Use macroprudential tools in coordination with other public
authorities.
•
Macroprudential tools:
1. Reserve requirements
2. Liquidity management
3. Capital adequacy ratios
4. Liquidity adequacy ratios
5. Taxes
6. Primary expenditures of government
38
Measures Taken by Other Authorities
1. Fiscal discipline
2. Ban on FX loans to households
3. Domestic currency bond market
4. Loan/value restrictions
5. Tax hikes on certain consumer loans
6. Restrictions on credit card borrowing
39
IV. Financial Stability Outcomes
So Far
40
Results: (1) Tightening the Liquidity
Reserve Requirements Balances
(billion TRY)
70
The new reserve requirements is effective as of
Apr 15, 2011 (approx. 19.1 billion TRY)
60
50
40
TRY required reserves
30
20
10
FX Required Reserves
0
01-09
04-09
07-09
10-09
01-10
04-10
07-10
10-10
01-11
04-11
Source: CBRT
41
Results: (2) Funding More Dependent on CB
Central Bank Liquidity
(billion TRY)
Weekly Repo Funding
Sterilization through ON Borrowing
3-month Repo Funding
Net Liquidity Provided
40
30
QT1
QT2
20
10
0
-10
-20
01-09
04-09
07-09
10-09
01-10
04-10
07-10
10-10
01-11
04-11
Source: ISE, CBRT
42
Results: (3) Volatility in Overnight Rates
Overnight Interest Rates
(percent)
Volatility in Overnight Interest Rates
(2-week standard deviation)
1.8
11
10
1.6
CBRT Lending Rate
9
1.4
Policy Rate
8
1.2
7
1.0
6
0.8
5
Overnight
Interest Rate
4
0.6
0.4
3
CBRT Borrowing Rate
2
1
08-10
09-10
10-10
Source: ISE, CBRT
11-10
12-10
01-11
02-11
03-11
04-11
0.2
0.0
09-10
10-10
11-10
12-10
01-11
02-11
03-11
04-11
Source: ISE, CBRT
43
Results: (4) Tightening of Monetary Conditions
Yield Curve*
(percent)
Inflation Expectations*
(percent)
10
9.5
Apr 6, 2011
9.0
9
12-month forward
8.5
8
8.0
7
7.5
6
Oct. 1, 2010
7.0
24-month forward
5
6.5
0.5
1.0
1.5
2.0
2.5
3.0
3.5
* Calculated from the compounded returns on bonds quoted in ISE Bills and Bonds
Market by using ENS method.
Source: ISE, CBRT
4.0
4
12-07
06-08
12-08
06-09
12-09
06-10
12-10
* CBRT Expectations Survey results from the second survey period.
Source: ISE, CBRT
44
Results: (5) Creating Wedge between Interest Rates
Interest Rates on Saving
Deposits*
Interest Rates on Loans*
12.5
9.5
12.0
11.60
9.0
11.5
11.0
8.5
10.5
10.53
8.0
10.0
9.5
7.5
9.12
9.0
7.0
Up to 1 month
Up to 6 months
Up to 3 months
Up to 1 year
04.11
03.11
02.11
12.10
11.10
10.10
09.10
08.10
8.0
07.10
04.11
03.11
02.11
01.11
12.10
11.10
10.10
09.10
08.10
07.10
6.5
01.11
8.36
8.5
Commercial Loan
Consumer Loan (Other Consumer+Vehicle+Housing)
45
Results: (6) Alleaviating the Pressure on Currency
USD against EM Currencies and TRY*
(4 Jan 2010=1)
1.15
Announcement of QE2
by the FED
TRY
1.10
Depreciation
1.05
1.00
Appreciation
0.95
EM Average
0.90
01-10
03-10
05-10
07-10
09-10
11-10
01-11
03-11
* Average of emerging market currencies including Brazil, Chile, Colombia, Czech Republic, Indonesia, Hungary, Mexico, Poland, Republic
of Korea and South Africa.
Source: Bloomberg, CBRT
46
Results: (7) Extending the Maturity of Deposits
Breakdown of TL Deposits by Maturities
Average Maturity of TL Deposits
(Day)
(%)
100
1.1
4.0 0.7
90
2.1
1.3
7.3
80
80
75
75
70
70
65
65
1 Year
and more
80
58.3
50
52.6
55
50.2
48.2
47.0
47.5
46.9
46.9
60
50
12.11
11.11
10.11
09.11
03.11
02.11
01.11
45
12.10
15.04.11
45
11.10
26.11.10
Sight dep.
10.10
0
09.10
15.1
08.10
14.4
50
07.10
10
Up to 1
Month
45.6
18.4
20
46.0
55
28.8
06.10
30
Up to 3
Month
54.7
60
40
08.11
Up to 6
Month
07.11
55.9
60
06.11
51.0
05.11
Up to 1
Year
04.11
70
Results: (8) Containing the Acceleration in Credit Growth
Loans* and Deposits** to GDP (%)
Annual Change in Credit Volume (%)
14
50
12
40
10
30
8
6
20
4
10
2
0
0
2011
2010
Change in Loans
-10
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
06.10
09.10
12.10
03.11
04.11
Change in Deposits
2009
2008
2007
-2
Corporate
Retail
48
CENTRAL BANK OF THE
REPUBLIC OF TURKEY
The Challenges of Balancing Hot Money Inflows vs
Conducting a Prudent Monetary Policy
Dr. Đbrahim Turhan
Deputy Governor
May 2011
49