A Success Story: Central Bank of Turkey and 2008 Financial Crisis

Especially after the 2008 financial crisis, many Central Banks (CB) all over the world have changed their policies and managements in order to be able to better handle a new possible crisis. Moreover, this crisis was an opportunity for CBs to apply new  strategies. Thanks to the precautions taken by CB of Turkey, Turkey was one of the few countries which got over the crisis with little damages in comparison with the deeply wounded develop nations. What made the CB of Turkey so succesfull during crisis and afterwards?

To begin with, Central Bank managed the foreing Exchange (FOREX) Market quite well during the crisis. Shortly after the indications of crisis, CB provided liquidity by FOREX purchasing auctions. Due to the unexpected reaction from the market, witnessing unhealthy pricing practices, a reverse step was taken immediately. To be able to control liquidity by other means, CB increased the transaction limits of banks in FOREX deposit market to $10.8 billion. Additionally maturity of the FOREX deposits borrowed within the predetermined limits was risen to 1 month from 1 week afterward it was expanded to 3 months. Simultaneously, borrowing rates were pulled down. Required Reserve (RR) ratios for FOREX was decreased to empose more liquidity to the market and utilization of credits was eased. Observing the effectiveness of policies applied and decreasing effects of the crisis, CB started to take a pace towards exit strategy to rebalance the economy; yet most of the steps taken do still exists.

On the other hand, Turkish Lira (TL) Market was also regulated effectively during the crisis. The first step taken was to decrease the overnight interest rate volatility which can be succeeded by reducing the CB’s borrowing and lending interest rate corridor by 1 point from 3.5 to 2.5. Further more, TL liquidity was injected to the market side effects of which were eliminated by overnight operations practiced at the end of the day. Due to liquidity demand, CB started to 3-month repo auctions which was insufficient so TL RR ratio was decreased from 6% to 5%. Thinking that inflation rate would fall due to the deepining crisis, CB borrowing rate was reduced from 16.75% to 6.50%.

After the crisis started to pass away, as an exit strategy, CB decreased the liquidity injected to market and afterwards an adjustment in the interest rates was applied. RR ratios were adjusted step by step the levels before the crisis.

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