Monetary Policy Guidelines for 2002:
1) Free-floating exchange rate regime continues. 2)CBT will adjust short-term interest rates by considering future inflation expectations. 3)CBT control in the daily money market to increase, assisting in adjusting daily liquidity in the market and to transmit monetary policy more effectively. 4)CBT will end its intermediary roles in swap and forward FX sales on a gradual basis to help improve these markets where the counterparty risk will play an important role. Financial analysts predict that by using these measures, the CBT will be able to reduce its volatility in interest rates and increase its grip on the monetary policy. Free-Floating Exchange Rate Regime Continues: The CBT will sterilize liquidity created when the Treasury borrows less than it needs by using the IMF loan for any more domestic repayments that may be required. When a strong FX supply arises due to FX substitution created when people shift from FX to TL denominated assets, the CBT will increase its FX reserves in a transparent manner without compromising the free-float regime. Also, without disturbing long-term equilibrium exchange rate. If such a need arises, the CBT will announce methods to be implemented. Monetary Target Will Be Base Money: Base money (sum of currency issued by CBT and deposits of the banks within the CBT, defining liabilities of CBT to the financial system). This is envisaged to increase by a nominal, unadjusted for inflation, increase in GNP that is estimated to be 40% by the end of 2002. So, base money will not increase in real terms throughout 2002. The base money which was an indicative target in 2002 will be converted into a performance target in order to anchor monetary expectations. Then, the floor on net international reserves will assist in keeping FX reserves at a certain level. In the case of backward FX substitution, the monetary base target could be relaxed, however, this does not contradict with the monetary policy because the goal of the monetary targeting would be to signal the containment of excessive monetary expansion. In the case of backward FX substitution, money demand increases which makes a revision in the monetary base target meaningful. The Main Tool Will Be Indirect Inflation Targeting: The CBT will adjust short-term interest rates by taking into account future inflation expectations. Every month, the CBT will release an ex-post inflation analysis and announce its expectations on the inflation rate. The CBT will not change interest rates by reviewing only a single monthly inflation outcome, it will take into account the underlying trend and factors affecting inflation.