(vi)  According to the new operational structure, overnight interest rates are mainly expected to fluctuate between the Central Bank borrowing interest rate and the interest rate of the liquidity facility submitted to primary dealer banks during the day. However, under normal conditions while determining the amounts of the auctions for repo and reverse repo auctions with a one-week maturity, the Central Bank, will endeavor to prevent both excessive fluctuation of the ISE Repo-Reverse Repo Market overnight interest rates, which is an indicator of secondary money market interest rates, and systematical formation of the said rates significantly below or above the repo auction interest rates. Additionally, with a view to preventing fluctuations in overnight interest rates and enhancing the flexibility of the banks’ liquidity management, the Central Bank may consider options like narrowing the interest rate band of the Late Liquidity Window on the due date of keeping required reserve ratios and allowing the banks to keep a certain amount of the required  14  BIS Review 3/2009  reserves in the following period or rendering the excess amounts to be effective for the following period. In cases where the liquidity shortage in the market increases and becomes permanent, the funding of the liquidity shortage only by repo auctions with a one-week maturity may have adverse effects on longer-term interest rates and the credit mechanism.
These shocks, of which some have prolonged impacts, caused inflation to exceed the targets during this period (Chart 1). Chart 1. Inflation developments in Turkey between 2002-2008  (*) November inflation rate was used for 2008. Source: TURKSTAT and CBT. BIS Review 3/2009  1  The first serious shock to the inflation-targeting regime in Turkey arose upon a time when international capital conditions changed to the disadvantage of developing countries and capital outflow was experienced in many countries including Turkey, from May 2006 onwards. In this period, depreciation of the New Turkish Lira (TRY) around 30 percent and the lack of confidence created by financial turbulence combined with sharp increases in food prices due to drought led inflation rates increase and inflation expectations exceed the targets considerably. In order to avoid any permanent effect on pricing behaviors, the Central Bank tightened monetary policy significantly and took a series of additional policy measures. These measures varied from suspending foreign exchange buying auctions to several arrangements regarding TRY and foreign exchange liquidity. Even though the gap between inflation expectations and inflation targets widened following fluctuations, inflation and inflation expectations were to a great extent brought under control, owing to the measures taken. In the period covering 2007 and onwards, the main factors impeding the disinflation process were sharp increases in oil and other commodity prices in the international markets along with adjustments in administered/directed prices.