The following interview with Central Bank Governor Sureyya Serdengecti appears in the current edition of Emerging Turkey 2003, which has just been released internationally. To order the book call +90 212 677 0580/81 or +44 207 403 7213, or visit our website, www.oxfordbusinessgroup.com
OBG: When will the Central Bank of the Republic of Turkey (CBRT) move to inflation targeting? How specifically will this work?
SERDENGECTI: We are continuing our technical preparations for the introduction of formal inflation targeting, with a view to be ready by the end of this year. To date, we have made significant progress to fulfil the preconditions. The new Central Bank Law ensures instrument independence, accountability and transparency in Turkish banking. We have also been improving our technical capabilities in order to support our analytical skills in line with the implementation requirements of the inflation-targeting framework. This has been achieved through improving better forecasting and effective policy analysis systems and expanding the information base including surveys. We also are improving our communication with the general public and the markets, mostly through publishing Monetary Policy Reports and issuing press releases to clarify monetary policy. In addition, parliament has approved the new law regulating the treasury’s debt management procedures, which initiated greater transparency and more market-based principles on the issuance of debt instruments.
I would like to emphasize that good progress has been achieved in completing the prerequisites for the adoption of inflation targeting. Once we have determined the inflation target together with the government, the CBRT will conduct monetary policy in line with the target. We are the ultimate body authorized and responsible to implement the monetary policy. With the objective to achieve and maintain price stability, the CBRT is authorized to utilize monetary policy instruments – mainly the short-term interest rate - and additionally we can directly determine and implement other monetary policy instruments that we may find appropriate.
OBG: Although the CBRT uses a floating exchange rate regime, do you still intervene occasionally? What kind of percentage change in the Turkish Lira/US Dollar exchange rate does the CBRT tolerate on a daily basis?
SERDENGECTI: Under the current floating exchange regime, the level of foreign exchange rate is determined by supply-demand conditions. However, the volatility in the foreign exchange rate is closely supervised by the CBRT. The CBRT may intervene directly only if an excessive volatility in both directions is observed. Throughout 2002, the CBRT intervened only once in the foreign exchange market via a direct sale on July 11, 2002, when there was excessive volatility in the market. It must be noted that there is neither a specified level where the CBRT tolerates the exchange rate to move, nor any determined level of volatility where the CBRT is assumed to intervene. The CBRT analyses the volatility by taking into account all the parameters rather than setting a specific "percentage" change to intervene.
OBG: For example, would the CBRT intervene to avoid large fluctuations in the event of political and/or economic crisis?
SERDENGECTI: As explained above, the CBRT would intervene in the foreign exchange market if there is excessive volatility by analysing the reasons in each case.
OBG: While the BRSA carried out the seizure of Pamukbank and part of Yapý Kredi Bank, in what ways was the Central Bank of Turkey involved?
SERDENGECTI: By the recent approval of the new Central Bank Law, the CBRT was assigned new responsibilities for maintaining overall financial system stability. Accordingly, in addition to pursuing price stability, the CBRT, like its modern counterparts, has the responsibility to promote the stability and soundness of Turkey’s financial system. In the new financial architecture, the CBRT will continue to develop its own methods of assessing financial market stability (macro prudential surveillance) and indicators of weaknesses, focusing more on the overall health of the financial system than that of individual institutions that fall under the BRSA, which became fully operational in August 2000. The decisions to license or revoke licenses, and to intervene rests with the BRSA. Therefore, the CBRT was not involved in the seizure of Pamukbank in any way whatsoever.
However, the CBRT has acted in coordination with the BRSA in taking the necessary measures in the money markets. In this context, banks under the recapitalisation program were allowed to conduct repo transactions with the CBRT via quotation method to meet their short-term liquidity needs. The interest rate of such repurchase transactions was determined by adding 2 points to the CBRT’s one-week borrowing rate. So the possible liquidity needs of Pamukbank that was taken over by the Savings Deposit Insurance Fund (SDIF), and the other banks under the recapitalisation process could be met in accordance with the said facility.
Although, the said banks were in a position to finance their liquidity needs in the markets, so far they have not used this facility provided for them. In addition, the CBRT abolished the reserve requirement obligation of Pamukbank like the other SDIF banks.