new how do capital flows challenge monetary policy in … · 2014. 9. 24. · 1 october, 2011...

1

October, 2011

Warsaw

HOW DO CAPITAL FLOWS CHALLENGE

MONETARY POLICY IN CESEE?

Erdem Başçı

Governor

Contents

2

I. Global Monetary Expansion

II. Price Stability

III. Financial Stability

IV. External Balance

I. Global Monetary Expansion

II. Price Stability

III. Financial Stability

IV. External Balance

3

Large-Scale Asset Purchases

1. Large-Scale Asset Purchase Programs (LSAPP): FED and BoE

2. Unprogrammed Large-Scale Asset Purchases (ULSAP):

ECB, BoJ, SNB

Global Monetary Expansion

4

0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1600

1800

Official Liquidity (US)

Source: FED, CBRT.

(Billion USD)

Excess Reserves

Currency in Circulation

5

0

50

100

150

200

250

300

350

400

450

500

500

550

600

650

700

750

800

850

900

Official Liquidity (Eurozone)

Source: ECB, CBRT. *Excess Reserves=ECB Balance Sheet Deposit Facility + Fixed Term Deposits

Excess Reserves* (RHS)

Currency in Circulation

(Billion Euro)

6

-20

-10

0

10

20

30

40

50

60

-20

-10

0

10

20

30

40

50

60

Official Liquidity (Turkey)

Source: CBRT. * Excess Reserves =Sterilization through ON Borrowing + Banking Sector Free Deposit - Banking Sector Required Reserves

(Billion TL)

7

Excess Reserves*

Currency in Circulation

Source: TurkStat, CBRT.

* Reported M2 excludes foreign currency deposits.

Private Liquidity (Turkey)

0

2

4

6

8

10

12

14

16

18 ∆M2*

GDP

(Percent)

8

Annual Change in Money Supply

I. Global Monetary Expansion

II. Price Stability

III. Financial Stability

IV. External Balance

9

Employment

Source: WEO, Turkstat, CBRT. *Difference of natural logarithms.

Annual Average Employment Growth* (2007-2010)

-5

-4

-3

-2

-1

0

1

2

3

4

5

-5

-4

-3

-2

-1

0

1

2

3

4

5

(Percent)

10

Potential Output: Capital and Labor

50

60

70

80

90

100

110

120

130

Labor market participation rate* (percent)

Source: TURKSTAT, CBRT.

*Seasonally adjusted.

Capital Stock (constant prices, natural logarithm, 2008=100)

Source: TURKSTAT, CBRT.

Trend

Capital Stock

11

45

46

47

48

49

50

51

The Policy Mix

Policy Dimension Current Stance

1. Policy Rate Accommodative

2. Liquidity Policy Non-Accommodative

3. Financial Sector Policy Non-Accommodative

Net Policy Stance Non-Accommodative

12

The Policy Mix

CBRT Policy Rate TL Reserve Requirement Ratios (RRR)

Source: CBRT.

0

5

10

15

20

25O/N Lending - Borrowing Interest Rate Corridor

1- week Repo Rate

Adoption of 1-week repo rate as the policy rate

Source: CBRT.

13

0

2

4

6

8

10

12

14

16

18

The range of RRR

Weighted average RRR

16,3

16,4

16,5

16,6

16,7

16,8

16,9

17

17,1

17,2

17,3

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 2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross Domestic Product

Actual and Trend GDP (natural logarithm, seasonally adjusted)

14

GDP

Trend

Source: CBRT.

0

5

10

15

20

25

30

0

5

10

15

20

25

30

Inflation in Turkey and EMs

Turkey

EM Average

Source: CBRT and Bloomberg. Average of EM countries: Brazil, Mexico, Czech Rep., Hungary, Poland, S. Africa, China, India, Russia. 15

(Percent)

Inflation Forecasts and Realizations

Source: CBRT. * Shaded region indicates the 70 percent confidence interval for the forecast.

16

0

2

4

6

8

10

12

Perc

ent

Forecast Range* Uncertainty Band Actual Inflation Year-End Inflation Targets

I. Global Monetary Expansion

II. Price Stability

III. Financial Stability

IV. External Balance

17

Global monetary expansion (LSAPP and ULSAP) fuels inflows to

emerging economies with a tendency towards;

a) More debt, less equity,

b) More foreign currency, less domestic currency,

c) More short term, less long term.

The Problem

18

In contrast, emerging economies should provide incentives for

financial inflows with a tendency towards;

a) More equity, less debt,

b) More domestic currency, less foreign currency,

c) More long term, less short term.

The Solution

19

-20

-10

0

10

20

30

40

50

60

70

80

Portfolio and Short-Term* FDI and Long Term Current Account Deficit

Main Sources of Current Account Deficit Finance (12-months Cumulative, Billion USD)

Source: CBRT. *Short-term capital movements consist of banking and real sector short term net borrowing and deposits in banks.

Composition of Capital Inflows

CBRT Measures

20

Source: CBRT.

Note: Period covers from November 2010 to September 2011.

Maturity Extension

Percentage Change in Turkish Lira Deposits by Maturity after Reserve Requirement Measures

(Percent)

21

-100

-50

0

50

100

150

200

250

Up to 1 month 1-3 months 3-6 months 6 months-1 year 1 year and more

-40

-20

0

20

40

60

80

100

120

140

-40

-20

0

20

40

60

80

100

120

140

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

t

Oct

No

v

Dec

Credit De-dollarization

Foreign Currency Loan Growth (Annualized, percent, 20 days moving averages)

Source: CBRT.

22

2011

2006-2010 Average

2010

Credit Growth

Total Loans*

(monthly change, percent)

Source: CBRT.

*Adjusted for the exchange rate effect.

** Monthly percentage change in credit volume as of 11 October,2011. 23

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

Average of the Previous 5 Years Last Period Difference

I. Global Monetary Expansion

II. Price Stability

III. Financial Stability

IV. External Balance

24

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2010 2006-2010 Average 2011

Consumer Loans (Annualized growth, percent, 4 weeks moving average)

Growth in Consumer Credit

Source: CBRT

BRSA Measures

RRR Hikes

25

0,9

1

1,1

1,2

1,3

1,4

Average of EM countries: Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, S. Africa, Indonesia, South Korea and Colombia. Last observation: October 14, 2011. Source: CBRT and Bloomberg.

TL

EM Average

TL and Other EM Currencies Against USD* (11 Nov. 2010=1)

Currency

De

pre

cia

tio

n

Ap

pre

cia

tion

CBRT Measures

26

80

90

100

110

120

130

140

150CPI Based Real Effective Exchange Rate (2003=100)

CPI (Developing Countries) Based Real Effective Exchange Rate

CPI (Developed Countries) Based Real Effective Exchange Rate

- - - - Provisional

REER

Source: CBRT.

CPI Based Real Effective Exchange Rate (2003=100)

27

Exchange Rates

23.08.2011 – 21.10.2011 01.11.2010 – 22.08.2011

Source: Bloomberg, CBRT. Note: Positive change means depreciation against US dollar.

Percentage Changes in Exchange Rates

28

-30

-20

-10

0

10

20

30

-5

0

5

10

15

20

Source: Bloomberg, CBRT. Emerging economies include Brazil, Chile, Colombia, Mexico, Poland, Hungary, Czech R., S.Africa, Indonesia, Korea and Turkey

Exchange Rate Volatility

29

5

10

15

20

25

30

Turkey Emerging Economies

Exchange Rate Volatility (percent, implied volatility for the next 12 months)

Current Account Balance (Seasonally Adjusted, Million USD)

Source: TURKSTAT, CBRT. Note: September data is forecast.

External Adjustment

30

-9000

-7000

-5000

-3000

-1000

1000

3000

Current Account (Excluding Energy) Current Account

31

October, 2011

Warsaw

HOW DO CAPITAL FLOWS CHALLENGE

MONETARY POLICY IN CESEE?

Erdem Başçı

Governor