Emergence in the Post-Crisis World: Increasing Role for - PowerPoint PPT Presentation

CENTRAL BANK OF THE REPUBLIC OF TURKEY Emergence in the Post-Crisis World: Increasing Role for Macroprudential Policies Mehmet Yörüko � lu Deputy Governor October 2012, Istanbul 1

The Need for Macroprudential Tools When the Macroprudential When the Macroprudential Tools are used Tools are not Used Interest Rate Curve Interest Rate Curve for Policy Rate Policy Rate for Financial Stability Financial Stability r F r F > r P Occurrence of Occurrence of Financial Risks r P Interest Rate Curve for Price Stability Interest Rate Curve for (Taylor Rule) Price Stability (Taylor Rule) 0 Output Gap 0 2

Increasing Need for Macroprudential Tools: 1. Structural Reasons 2. Conjectural Reasons 3

Structural: Differences in Monetary Policy • Convergence dynamics together with the consumer basket asymmetries; – Inflation in EMEs and developing countries has an upward pressure; – EME Central Banks are more concerned about inflation whereas advanced countries’ about inflation whereas advanced countries’ Central Banks are more concerned about growth. – In EMEs and developing economies, • Tighter monetary policy • Exchange rate appreciation • Higher inflation targets

Growth Differential 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 5

Inflation Differential Core Inflation (annual change) 5 Advanced Countries 4 Emerging Countries 3 2 1 0 Oct-07 Oct-08 Oct-09 Oct-10 Jul-07 Jul-08 Jul-09 Jul-10 Jan-07 Apr-07 Jan-08 Apr-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Source: Bloomberg, CBRT 6

Interest Rate Differential Policy Rates (percent) 12 10 Advanced Countries Emerging Countries 8 6 6 4 2 0 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jan-07 Jul-07 Oct-07 Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Source: Central Banks, CBRT 7

Conjectural: Quantitative Easing TURKISH ECONOMY AS OF LATE 2010 TURKISH ECONOMY AS OF LATE 2010

Challenge: Macro Financial Risks Main Sources of Current Account Deficit Finance Monthly Imports and Exports (Seasonally Adjusted, Million USD) (12-months Cumulative, Billion USD) 70 Portfolio and Short-Term* 20000 Exports (excluding gold) FDI and Long Term 60 Current Account Deficit 18000 Imports 50 16000 40 30 14000 20 12000 12000 10 10000 0 8000 -10 -20 6000 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 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 *Short-term capital movements are sum of banking and real sectors' short term net credits and deposits in banks. *Source: TurkStat. 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.

Current Account Deficit and Credit Growth Credit Use and Current Account Deficit Current account deficit was driven by excess credit growth.

Real Exchange Rates CPI and PPI Based Real Effective Exchange Rates (2003=100) Source: CBRT.

POLICY RESPONSE POLICY RESPONSE

Modifying the conventional IT framework Enrich the set of policy instruments Supplementary objective: Financial Stability Supplementary objective: Financial Stability Rebalance the economy through a slowdown in credit growth and a realignment of the exchange rate

Multiple Instruments, Multiple Goals Liquidity Credit Policy Policy One-week repo •Reserve •Interest rate rate requirements corridor •Macro-prudential •Other liquidity tools facilities Instruments Instruments Intermediate Target •Exchange Rate •Credit Growth FINANCIAL STABILITY PRICE STABILITY Goals

Implementation of Monetary Policy CBRT Policy Rates TL Required Reserve Ratios (Percent) (Percent) Source: CBRT. Source: CBRT.

Exchange Rates vis-à-vis Emerging Markets TL and Other EM Currencies Against USD* (11 November 2010=1) CBRT Measures c � ation TL Deprec Apprec � at � on EM Average Average of EM countries: Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, S. Africa, Indonesia, South Korea and Colombia. Latest observation: February 23, 2012. Source: CBRT and Bloomberg.

Impact of the Policy Mix on Credit Growth Consumer and Total Loans Growth (y-o-y, percent, 13 weeks moving average) RRR BRSA Hikes Measures Source: CBRT

Maturity Extension Percentage Change in Turkish Lira Deposits by Maturity after Reserve Requirement Measures (Percent) 200 150 100 50 0 -50 -100 Up to 1 month 1-3 months 3-6 months 6 months-1 year 1 year and more Source: CBRT. Note: Period covers from November 2010 to September 2011. 18

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������������������ � A bank must hold its RR, in TL for its TL Reserve Reserve liabilities and in U.S. dollar or euro for Requirements Requirements FX liabilities, in its accounts with the CBRT. � Furthermore, up to 60 % of TL RR can be maintained in US dollar or euro and up to 30 % of it can be maintained in Foreign Foreign TL TL stardard gold, by multiplying certain Currency Currency reserve option coefficients (ROC) for each tranches. � RR for the precious metal deposit ���� ���� accounts, part of FX RR, can be ������ ������ TL TL FX FX Gold Gold ��� ��� maintained in standard gold. FX FX ���� ���� ���� ���� (max (max precious precious ������ ������ ���� ���� ���� ���� 30%) 30%) ������� ������� ����� ����� 20

������������������ � The remuneration for both of RRs were terminated after Lehman crisis in order to increase the effectiveness of the policy tool. � There is carry carry-over over facility, facility, which allows depository institutions to carry over 5 percent of excess or deficiency of their TL RR in a MP to be used or made up only in the following MP. � Lastly, there is a non � Lastly, there is a non non-compliance non-compliance compliance penalty compliance penalty penalty in effect. If a bank fails to comply penalty in effect. If a bank fails to comply with RR on time or with insufficient amounts, it is required to hold interest-free deposits in blocked accounts with the CBRT in the amount � double the deficient portion of TL RR in term of TL, � three-fold the deficient portion of the foreign currency RR in term of U.S. dollar, taking into account the periods of deficiency. 21

Definition of ROC � Reserve Option Coefficients (ROC), in effect since June 8, 2012, is used for calculating of the amount of FX or gold to be held for fullfiling TL RR obligations, if the bank wants to use the facility. 100% 90% 80% 70% 70% 60% 50% 40% 30% 20% 10% 0% 16.09.11 30.09.11 28.10.11 30.03.12 08.06.12 22.06.12 06.07.12 20.07.12 17.08.12 31.08.12 28.09.12 TL FX Gold 22

Definition of ROC ROC for FX Facility ROC for Gold Facility 23

Definition of ROC ROC for Gold Facility ROC for FX Facility Portin of TL RR that could be held in FX Portin of TL RR that could be held in gold 24

Preconditions for Effective ROC Mechanism � Relatively high level of RRRs � Unremunerated RR � � Substantial interest rate differential between domestic and foreign currencies 25

10 20 30 40 50 60 70 0 16.09.11 � Banks have adapted to the ROC policy quickly and 56,3/60 of FX facility and FX Facility for TL RR 14.10.11 25,4/30 of gold facility was used as of 14.09.2012. 11.11.11 Limit 09.12.11 06.01.12 03.02.12 02.03.12 FX Facility for TL RR 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 Utilization Ratios 10 15 20 25 30 35 0 5 Gold Facility for TL RR 16.09.11 14.10.11 11.11.11 Limit 09.12.11 06.01.12 03.02.12 Gold Facility for TL RR 02.03.12 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 100 50 55 60 65 70 75 80 85 90 90 95 Gold Facility for FX RR 16.09.11 14.10.11 Limit 11.11.11 09.12.11 06.01.12 03.02.12 02.03.12 Gold Facility for FX RR 30.03.12 27.04.12 25.05.12 22.06.12 20.07.12 17.08.12 14.09.12 26

Conclusion � Reserve requirements system in Turkey � has been used very actively since Lehman crisis. � is very comprehensive and flexible. � contains many dimentions for lenghtening maturity, controlling credit growth and capital flows � ROC is a macro-prudential tool, contributing to financial stability. It plays a crutial role as a buffer and creates flexibility in times of high volatility in capital flows. 27

CENTRAL BANK OF THE REPUBLIC OF TURKEY Emergence in the Post-Crisis World: Increasing role for Macroeconomic Policies Mehmet Yörüko � lu Deputy Governor October 2012, Istanbul 28