Download Monetary Policy in the Post-Crisis Period A. Hakan Kara

Monetary Policy in the Post-Crisis Period
A. Hakan Kara
Research and Monetary Policy Department
Koç University-TUSIAD ERF Conference
October 10, 2011
Contents
I. Changing View of Central Banking
II. Capital Flows to Emerging Markets
III. Reflections on the Turkish Economy
IV. Policy Measures and Outcomes
2
Emerging consensus after the global crisis
More emphasis on financial stability, especially
from a systemic risk and macro perspective
Monetary policy should not ignore financial cycles
and asset price booms.
3
Changing view of central banking
Before crisis: single objective (price stability) single
instrument (short term policy rate)
After Crisis: multiple objectives (price stability,
financial stability), multiple instruments (credit,
liquidity and interest rate policy)
Question: What does this imply for Emerging Market
(EM) policy frameworks?
4
Post Crisis Dynamics, Global Imbalances,
and Factors Driving Capital Flows to EMs
5
Growth Differentials
GDP Growth Rates
(YoY, per cent)
10
Advanced countries
Developing countries
8
6
4
2
0
-2
-4
-6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg, CBRT calculations.
6
Inflation Differentials
Core Inflation
(YoY, per cent)
6
Advanced countries
Developing countries
5
4
3
2
1
0
2006
2007
2008
2009
2010
2011
Source: Bloomberg, CBRT calculations.
7
Policy Rates
Policy Rates
(per cent)
Advanced countries
12
Developing countries
10
8
6
4
2
0
2006
2007
2008
2009
2010
2011
Source: Bloomberg, CBRT calculations.
8
Quantitative Easing
Central Bank Balance Sheets
2,300
ECB (billion euro)
3,000
FED (billion USD)
2,100
2,500
1,900
1,700
2,000
1,500
1,300
1,500
1,100
900
1,000
700
500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: ECB, FED.
9
Relative Riskiness Implied by Credit Ratings
Source: IIF
10
Relative Riskiness Implied by the Market
CDS Rates for Selected Countries
700
700
600
600
500
500
Emerging Economies
400
400
Mature Economies
300
300
200
200
100
100
0
0911
0910
1110
0111
0311
0511
0711
0909
1109
0110
0310
0510
0710
0908
1108
0109
0309
0509
0709
0907
1107
0108
0308
0508
0708
0906
1106
0107
0307
0507
0707
0106
0306
0506
0706
0
Source: Bloomberg, CBRT calculations.
Mature economies include Germany, France, Italy, Spain and Japan. Emerging economies include Brazil, Chile, Colombia, Peru, Mexico, Hungary, Poland, Russia, Turkey, Thailand, Indonesia, Philippines, China and Malaysia.
11
Resulting Dynamics in Emerging Markets
Surging capital inflows
Real exchange rate appreciation
Rapid credit growth
12
Reflections on the Turkish Economy
and the Policy Response of the CBRT
13
Macro Financial Risks
Monthly Imports and Exports (Seasonally Adjusted, Million USD)
Main Sources of Current Account Deficit Finance
(12‐months Cumulative, Billion USD)
70
20000
Exports (excluding gold)
Imports
18000
60
Portfolio and Short‐Term*
FDI and Long Term
Current Account Deficit
50
16000
40
14000
30
20
12000
10
10000
‐10
6000
‐20
2007:01
2007:03
2007:05
2007:07
2007:09
2007:11
2008:01
2008:03
2008:05
2008:07
2008:09
2008:11
2009:01
2009:03
2009:05
2009:07
2009:09
2009:11
2010:01
2010:03
2010:05
2010:07
2010:09
2010:11
8000
*Source: TurkStat.
2007:01
2007:03
2007:05
2007:07
2007:09
2007:11
2008:01
2008:03
2008:05
2008:07
2008:09
2008:11
2009:01
2009:03
2009:05
2009:07
2009:09
2009:11
2010:01
2010:03
2010:05
2010:07
2010:09
2010:11
0
*Short-term capital movements are sum of banking and real sectors' short
term net credits and deposits in banks.
Source: CBRT.
Global imbalances combined with the post-crisis dynamics led to a divergence
between external and domestic demand and a surge in short term capital inflows.
14
Defining the Problem
Financial stability from a macro perspective:
How to reduce the risk of a sudden stop?
Main Task: Engineer a soft-landing without
hampering the price stability objective.
15
Methodology
Modifying the conventional IT framework:
Enrich the set of policy instruments
Supplementary objective: Financial Stability
Rebalance the economy through a slowdown in
credit growth and a realignment of the exchange rate
16
Multiple Instruments, Multiple Goals
Liquidity
Policy
Credit Policy
•Reserve
requirements
One-week repo
rate
•Other macroprudential tools
•Interest rate
corridor
•Other liquidity
facilities
Instruments
Transmission
Channels
PRICE STABILITY
FINANCIAL STABILITY
Goals
Selected Items from the CBRT Policy Toolkit
¾ One-week Repo Rate
¾ TL Required Reserve Ratios
ƒ Remuneration strategy of TL required reserves
ƒ Differentiating across maturities
ƒ Changing the scope of liabilities subject to reserve requirements
ƒ Flexibility in the currency denomination of required reserve balances
¾ FX Required Reserve Ratios
¾ Interest Rate Corridor
¾ Other Liquidity Facilities
Changes in liqudity management strategies and operational rules
¾ FX Liquidity Facilities
ƒ FX Purchasing/Selling Auctions
• Changes in the auction methods according to liquidity conditions
ƒ Adjustments in the FX liquidity provision facilities
ƒ Changes in the export rediscount credit facilities
Challenge: Communicating the New Approach
1. No clear definition of financial stability
2. Uncertain transmission mechanisms
Solution: Communicate in terms of observables
Current account deficit and its financing
Exchange Rate
Credit growth
Rebalancing Strategy
Step 1: Keep short term rates as low as possible
and use interest rate corridor to discourage short
term capital inflows to allow an orderly realignment
in exchange rates.
Step 2: Tighten through macro prudential
instruments to curb credit growth and domestic
absorption ( in coordination with other authorities).
Implementing The Policy Mix
CBRT Policy Rate and
Interest Rate Corridor
25
TL Reserve Requirement Ratios (RRR)
O/N Lending ‐ Borrowing Interest Rate Corridor
The range of RRR
Weighted average RRR
18
1‐ week Repo Rate
16
20
14
Adoption of 1‐week repo rate as the policy rate
15
12
10
8
10
6
4
5
2
0
0
Source: CBRT.
Source: CBRT.
21
Impact of the Policy Mix on Exchange Rates
TL and Other EM Currencies Against USD*
(11 Nov. 2010=1)
1.3
CBRT Measures
TL
1.1
EM Average
0.9
Appreciation
1
Depreciation
1.2
Average of EM countries: Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, S. Africa, Indonesia, South Korea and Colombia.
Latest observation: October 4, 2011.
Source: CBRT and Bloomberg.
22
Impact of the Policy Mix on Consumer Credit
Consumer Loans
(Annualized growth, percent, 4 weeks moving average)
70
RRR
Hikes
BRSA
Measures
60
50
40
2006‐2011 average
30
20
2011
10
0
Source: CBRT
23
Outcome: Rebalancing
Current Account Balance
Main Sources of Current Account Deficit Finance
(Seasonally Adjusted, Quarterly Average, Million USD )
(12‐months Cumulative, Billion USD) CBRT Measures
3000
80
2000
70
Portfolio and Short‐Term*
FDI and Long Term
1000
60
0
50
-1000
40
-2000
30
-3000
20
-4000
10
-5000
Current Account
0
-6000
‐10
Current Account (Excluding Energy)
-7000
‐20
-8000
1
2
3
2007
4
1
2
3
2008
4
1
2
3
2009
*Forecast for August and September.
Source: TURKSTAT, CBRT.
4
1
2
3
2010
4
1
2 3*
2011
Source: CBRT.
*Short‐term capital movements consist of banking and real sector
short term net borrowing and deposits in banks.
24
Outcome: Inflation and Inflation Expectations
Inflation
Medium Term Inflation Expectations
30
30
10
12-Month
25
25
9
20
20
8
15
7
10
10
6
5
5
5
0
4
15
Turkey
24-Month
Source: CBRT and Bloomberg.
Average of EM countries: Brazil, Mexico, Czech Rep., Hungary, Poland, S. Africa, China, India, Russia.
0911
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0103
0603
1103
0404
0904
0205
0705
1205
0506
1006
0307
0807
0108
0608
1108
0409
0909
0210
0710
1210
0511
0
0908
EM Average
* CBRT Survey of Expectations.
Source: CBRT.
25
Conclusion
Post crisis dynamics have highlighted the crucial role of
financial stability, leading central banks to be more
"creative" in the conduct of monetary policy.
The CBRT has formulated and implemented a new
strategy to deal with macro financial risks posed by
extraordinary global circumstances.
The new policy mix has been effective in rebalancing
the economy while controlling inflation expectations.
26
Monetary Policy in the Post-crisis Period
A. Hakan Kara
Research and Monetary Policy Department
Koç University-TUSIAD ERF Conference
October 10, 2011