Taking into consideration of this, the Central Bank, when deemed necessary, will always continue to take additional measures within its means prudently in order to ensure the smooth functioning of the FX market and to support FX liquidity. In this framework, in the event of further intensifying of the financial turmoil in global markets that might have negative impacts on the Turkish economy; (i)  Under the basic principles of the floating exchange rate regime, if unhealthy fluctuations are witnessed in the foreign exchange market due to a decrease in the depth of the market foreign exchange selling auctions will be held  BIS Review 3/2009  9  (ii)  Transaction limits for banks in the Foreign Exchange and Banknotes Markets will be raised,  (iii)  The FX required reserve ratio might be further reduced to a limited extent. The Central Bank will continue to closely monitor exchange rate developments in 2009 and will directly intervene in the market in case of any unhealthy fluctuations in the exchange rates due to speculative behavior stemming from a decrease in the market depth. Moreover, the purchase/sale transactions of “foreign exchange against foreign exchange,” “foreign exchange against foreign banknotes” and “foreign banknotes against foreign banknotes” conducted between the Central Bank and institutions authorized to operate in the Foreign Exchange and Banknotes Markets will continue in 2009.
For instance, while an unexpected and strong monetary tightening was implemented in the face of capital outflows in the May-June 2006 period, an expansionary monetary policy was adopted following capital outflows in the last quarter of 2008 (Chart 4). The contradiction between these two responses can be explained mainly by the significant differences between the said two periods in terms of both economic conjuncture and the sources of the shocks. As both domestic demand and external demand were strong in 2006, the exchange rate movements triggered by capital outflows had the potential to rapidly damage disinflation and inflation expectations. However, in 2008, it is observed that the downward pressure of the global recession and weak domestic demand conditions on the inflation has come to the forefront. 4  BIS Review 3/2009  Chart 4. Policy rates and market interest rates in the 2006-2008 period  26  Policy Rate (Compound)  June 2006 24  Secondary Market Benchmark Interest Rate (Compound)  22 20 18 16 14  November 2008 06.11.2008  18.09.2008  06.08.2008  24.06.2008  09.05.2008  26.03.2008  12.02.2008  28.12.2007  13.11.2007  27.09.2007  14.08.2007  02.07.2007  18.05.2007  05.04.2007  21.02.2007  09.01.2007  22.11.2006  05.10.2006  22.08.2006  10.07.2006  26.05.2006  12.04.2006  28.02.2006  16.01.2006  12  Source: CBT and ISE. In sum, it is seen that the inflation-targeting regime has provided a significant amount of flexibility to take the necessary measures in the face of high-level shocks.