In this context, policy rates, liquidity management facilities, and reserve requirement ratios are concurrently used to ensure price stability and financial stability. Therefore, the Monetary Policy Committee is of the opinion that given the economic situation, the combination of a lower policy rate, a wider interest rate corridor and higher reserve requirement ratios is the most appropriate policy mix in terms of jointly upholding financial stability and price stability. In this respect, the policy rate -the one-week repo auction rate – was reduced from percent to 6.25 percent in the last two months. In addition to the policy rate cuts, the CBRT decreased the overnight borrowing rate by 450 basis points to 1.5 percent. The corridor between the overnight lending and borrowing rates was widened to allow fluctuations in short-term interest rates, when needed (Figure 10). All these decisions aim to extend the maturity of short-term capital inflows as well as to prevent the Turkish lira from following trends that are detached from economic fundamentals. BIS central bankers’ speeches  5  Another issue taken into consideration when formulating the new policy mix was to limit rapid credit growth, an important factor contributing to the widening of the current account. In this context, reserve requirement ratios are used as active policy instruments with an aim to decelerate the credit growth and to extend maturities of banks’ liabilities.
These two examples are of course extremely simplistic, and are not realistic parameterisations of the Bank’s actual RSS. In broad terms, the elasticity of the Bank’s RSS is pinned down by three broad considerations. First, the Bank sees merit in allocating some funds regularly against wider collateral, to ensure counterparties remain familiar with the auction structure and continue to participate. Second, the Bank should not undermine the incentives to manage liquidity prudently. And third, the auctions should permit an increased allocation against wider collateral to the system in the face of adverse liquidity shocks and the associated heightened demand for liquidity. While the principles underlying the Bank’s RSS are clear, the precise configuration of the RSS is not revealed to the market, so reducing the scope for firms to game the Bank, and encouraging them to bid according to need. The Bank’s supply curve should be continuous but otherwise need not be linear. In particular the Bank can use the results from each operation to determine the degree of stress in the market and hence adjust the scale of the operations accordingly. Equilibrium The equilibrium point, which pins down the clearing spreads and the share of funds allocated to the two collateral sets, is determined by the intersection of the observed demand curve, and the Bank’s RSS. Chart 7 illustrates that using our hypothetical auction bids from Table 1 above, and three hypothetical linear RSS schedules. In case of intersections such as those given by curves A and B, a unique equilibrium is well defined.