Monetary Policy and Inflation Targeting
Who determines the inflation targets and for how long are these targets valid?

The inflation targets are jointly set by the Central Bank and the Government for three-year periods. However, the Bank shall determine, at its own discretion, the monetary policy that it shall implement and the monetary policy instruments that it shall use to achieve these targets. In other words, the Central Bank has instrument independence in monetary policy. 

What does the Central Bank do if it misses the inflation targets? How does the Central Bank’s accountability principle work?

Article 42 of the Central Bank Law stipulates that “The Bank shall submit information to the Government in writing and inform the public disclosing the reasons for the failure to achieve the pre-determined targets in due time or the occurrence of the possibility of not achieving the targets and the measures to be taken thereof”. In order to clarify the accountability mechanism and facilitate its functioning, the Central Bank establishes a symmetrical uncertainty band around the year-end point target. Thus, the accountability mechanism will be implemented should the deviation from the target exceed the uncertainty band.

As inflation targets are set as year-end targets and as part of its accountability responsibility, should the year-end inflation exceed the target by a significant margin, the Central Bank shall write a detailed letter to the Government. Moreover, to enhance accountability, should quarterly inflation rates exceed the uncertainty band set around the year-end target, the Central Bank announces in Inflation Reports the reasons for the deviation and the measures that have been already taken as well as those yet to be taken to achieve the target.

Moreover, the Governor’s biannual presentations on the Central Bank’s activities and monetary policy implementations before the Council of Ministers and the Planning and Budget Commission of the Grand National Assembly of Turkey are part of the accountability mechanism.

What is the Central Bank’s main policy instrument?

The main policy instrument of the Central Bank is short term interest rates.

How does the Central Bank set policy rates?

Monetary policy decisions are made by the members of the Monetary Policy Committee who vote at meetings held according to a pre-announced schedule. Interest rate decisions are made with a medium-term perspective focusing on the future inflation outlook. The Central Bank does not instantly react to the temporary impacts of large exogenous shocks on inflation, but extends the policy reactions over time by focusing on medium-term targets. In this framework, while making policy rate decisions, the Monetary Policy Committee uses a large set of data comprised of the total supply-demand balance, indicators pertaining to fiscal policy, monetary indicators and credit aggregates, wage-employment-unit price-productivity developments, pricing behaviors of the public sector and the private sector, inflation expectations, exchange rates and the factors that might affect them, analyses of probable exogenous shocks, and projections formed using the economic forecast systems within the Bank.


How can I learn the Central Bank’s inflation and interest rate projections?

The up-to-date inflation forecasts are presented in the quarterly Inflation Reports that are the main communication tool of the CBRT’s monetary policy. In this report, a general overview of the factors affecting inflation is presented along with signals as to the interest rate policy that might be implemented in the future. These signals do not contain specific figures but incorporate qualitative information.  

When and how does the Central Bank announce its policy rate decisions?

The policy rate decisions made at the Monetary Policy Committee meetings and a brief statement explaining their rationale are announced on the CBRT website at 2 p.m. on the day of the MPC meeting. The English translation of the decision is also posted on the CBRT website on the MPC meeting day.

Financial Stability
How is the Central Bank’s mandate about financial stability defined in the Law?

The Central Bank Law stipulates that the Central Bank’s fundamental duties and powers are: to take precautions for enhancing stability in the financial system and to take regulatory measures with respect to the money and foreign exchange markets (Article 4-I/g), to monitor the financial markets (Article 4-I/h), and to request and gather statistical information from banks, other financial institutions as well as from establishments and institutions authorized to regulate and supervise these institutions in order to monitor financial markets (Article 4-II/g).

Why does the Central Bank publish Financial Stability Reports?

On the international level, central banks review their structures to directly and effectively monitor financial stability and work on new analysis techniques. They issue Financial Stability Reports to share their evaluations with the public. The aim of these reports is to make information accessible to concerned parties and to contribute to financial stability. To this end, the Central Bank of Turkey, with a macro perspective, closely monitors vulnerabilities in the financial system, evaluates the risks that could destabilize the system and issues the biannual Financial Stability Report to share its analyses and views with the public to allow a timely and effective management of the risks as well as to make sure that healthier assessments are made in the domestic and international markets. Moreover, the Central Bank strives to enhance transparency, accountability and predictability, and in this regard, the Financial Stability Report is one of the basic policy readings of the Central Bank.

CBRT’s Exchange Rate Policy and Reserve Management
What is the role that the Central Bank plays in foreign exchange markets?

As stipulated in Article 4 of Law No. 1211 on the Central Bank, the exchange rate regime shall be determined jointly with the Government. Nevertheless, deciding on the exchange rate policy to be implemented is exclusively the Central Bank’s responsibility. Turkey implemented an implicit inflation targeting strategy from 2001 till 2006, and in 2006 a formal inflation targeting strategy was adopted. In both periods, a floating exchange rate regime was the prevailing foreign exchange regime. In a floating exchange rate regime, exchange rates are neither a target nor a policy instrument. The only variable that the Central Bank sets as a target is inflation and the main policy instrument that the Central Bank uses to achieve its targets is short-term interest rates.

In this framework,

  • Under the current floating exchange rate regime, the exchange rates are determined by supply and demand conditions in the market and the Central Bank has no exchange rate target whatsoever.
  • As there is no exchange rate level to be maintained, the importance of foreign exchange reserves is quite low compared to fixed exchange rate or currency peg regimes. However, in developing countries like Turkey, having a strong foreign exchange position contributes to alleviating the adverse impacts of domestic and external shocks on the economy. Moreover, taking into account the Treasury’s external debt repayments and the need to gradually decrease the level of high-cost workers’ remittances that count for an important part of liabilities on the CBRT balance sheet, the Central Bank, with the aim of building up reserves, occasionally holds foreign exchange buying auctions during times when the foreign exchange supply grows faster than foreign exchange demand.
  • The Central Bank, which has been implementing a moderate reserve-raising strategy, holds foreign exchange buying auctions in a way that minimizes the impact on supply and demand conditions in the markets and suspends FX buying auctions when there is excessive FX liquidity shortage.
  • Moreover, as stated repeatedly in the Central Bank press releases, fluctuations in exchange rates are always monitored very closely, and the Central Bank can directly intervene in the market in case of excessive volatility in either direction. A decision to intervene is not simply based on past data, but on a comprehensive evaluation of all materialized and potential fluctuations. 
What is the legal status of the Central Bank?

The Central Bank was established and organized in the form of a joint stock company with Law No. 1211, has not been defined as a central or decentralized government establishment, or even as an independent government authority, has been excluded from the definition of subsidiary-affiliated and related institutions, is exempt from hierarchical governance and trusteeship, and has been excluded from the scope of Budget Laws. Thus, the Bank has been vested with a sui generis legal status, which can be defined as independence. 

Who are the shareholders of the Central Bank?

The shares of the Central Bank of the Republic of Turkey are divided into (A), (B), (C) and (D) classes.

Class (A) shares belong exclusively to the Treasury and cannot be less than 51 percent of the capital.

Class (B) shares have been allocated to national banks operating in Turkey.

A maximum of 15,000 shares has been allocated as Class (C) shares to banks other than the national banks and to chartered companies. Class (D) shares have been allocated to Turkish commercial institutions and to legal and real persons of Turkish nationality.

General information on the Bank’s shares as well as other information regarding the holders of class (A), (B), (C) shares and class (D) shareholders with shares above a certain ratio, the amount of their shares and the ratio of these shares to the total capital can be obtained from Annual Reports and Independent Audit Reports.

Is the Central Bank audited? How?

As a joint stock company, the Central Bank is inspected via internal and external audits.

Internal Audit

Pursuant to Article 15 of the Central Bank Law, the General Assembly examines and approves the Annual Report submitted by the Board and the report of the Auditing Committee as well as the balance sheet and the income statements of the Bank. The General Assembly performs the audit of the Bank’s annual activity by rendering decisions on the actions of the Board and the Auditing Committee every year.

Pursuant to Article 24 of the Central Bank Law, the Auditing Committee audits all the operations and accounts of the Bank and submits its report to the General Assembly at the end of each year. The Auditing Committee, in the scope of the power granted by the Central Bank Law, submits its opinions in writing to the Board and also presents a copy to the Prime Ministry.

The Audit Department, which has been granted the power and duty to audit the Bank’s operations by Article 49 and Article 50 of the Regulation on the Organization and Duties of the CBRT, inspects the units, branches and representative offices of the Bank as well as other institutions and organizations in the scope of the power and duties entrusted to the Bank by Law No.1211 and other legislation; undertakes examinations and research; carries out investigations when needed, and offers consultancy services. 

External Audit

Article 42 of the Central Bank Law provides the legal basis for the external audit of the Bank. According to this Article, the Prime Minister has the power to have the operations and accounts of the Bank audited.

Pursuant to Article 42 of the Central Bank Law, the Governor submits a report to the Council of Ministers on the operations of the Bank and the monetary policy followed and to be followed, in April and October each year. The Bank also provides the Planning and Budget Commission of the Grand National Assembly of Turkey with information on its operations twice a year.

Pursuant to Paragraph 2 of Article 42 of the Central Bank Law, the Bank may have its balance sheet and income statements audited by independent external auditing institutions. The independent external auditing practice, which is deemed to be one of the most effective tools for the “transparency” and “accountability” principles of central banks functioning at international standards, was initiated at the Central Bank of the Republic of Turkey in 2000. Reports based on the results of independent audits conducted each year are disclosed to the public via the Bank’s website.

Apart from the internal and external audits, the Undersecretariat of Treasury, the State Supervisory Council, some ministries and other public authorities may have their inspection staff conduct audits at the Bank on issues related to their duties when deemed necessary.

What is implied by the Central Bank independence?

It implies that the Central Bank has “instrument independence”. It is clearly stated in Article 4 of the Central Bank Law that the primary objective of the Bank is to achieve price stability. Because the primary objective of the monetary policy has been set as achieving price stability, the CBRT does not have “goal independence”. The same Article continues with the sentence “The Bank shall determine at its own discretion the monetary policy that it shall implement and the monetary policy instruments that it shall use in order to achieve and maintain price stability”. In other words, the Bank has the capacity to directly determine the monetary policy it will implement and the monetary policy instruments it will use to achieve the price stability objective. This means that the Central Bank, just like various central banks in advanced economies, enjoys an instrument independence granted to it by law. 

What are the differences and similarities between the balance sheets of the Central Bank and commercial banks?
  • The fundamental differences between the balance sheets of the Central Bank and commercial banks are as follows: Pursuant to Article 4 of Law No. 1211 on the Central Bank, the privilege of issuing banknotes in Turkey rests exclusively with the Central Bank, and the banknotes put into circulation are monitored via the “Banknotes in Circulation” item in the liabilities of the Central Bank Balance Sheet.
  • Pursuant to Article 41 of Law No. 1211 on the Central Bank, the Central Bank has been entrusted with the duty to act as the treasurer for the Government. In the conduct of relations with the International Monetary Fund (IMF), of which Turkey has been a member since 1947, the Undersecretariat of Treasury has been assigned as the fiscal agent and the Central Bank as the depository. In this framework, financial relations originating from Turkey’s membership of the IMF (assets and liabilities of our country) are displayed solely in the balance sheet of the Central Bank.
  • Pursuant to Article 61 of Law No. 1211 on the Central Bank, unrealized revenues and expenses arising from the revaluation of gold and foreign exchange in the assets and liabilities of the Bank due to the changes in the value of the Turkish lira are shown in the “Valuation Account” item included in the assets and liabilities of the CBRT’s balance sheet. Unrealized expenses are displayed in the assets of the balance sheet while unrealized revenues are shown in the liabilities of the balance sheet. In cases where these revenues and expenses realize, the realized amounts are transferred to profit and loss accounts. However, in commercial banks, unrealized revenues and expenses are transferred directly to profit and loss accounts. 
What is the role of the Central Bank in Government Domestic Debt Securities (GDDS) auctions?

In the framework of Law No. 1211 on the Central Bank and Law No. 4749 on the Regulation of Public Financing and Debt Management, the Central Bank, in its capacity as the fiscal agent of the Treasury, is responsible for holding GDDS auctions on behalf of the Treasury. The properties of securities and the conditions for the issue of these securities are determined and disclosed to the public by the Treasury, and the offers are received by the Central Bank. After receiving all the offers, the Central Bank conveys the offer lists to the Treasury as well as its suggestion for the amount of securities to be auctioned. Once the Treasury sets the final amount of the sale, the results of the auctions are disclosed to the public by the Central Bank. The Central Bank also receives all the collaterals and returns the collaterals of rejected participants on the day of auction, and collects the auction amount and delivers the securities to the participants on the day of issue.

What is the function of the Interbank Money Market within the CBRT?

The Interbank Money Market (Interbank) operating under the CBRT was established on 2 April 1986 to encourage reserve movements among banks, to ensure efficient utilization of resources in the banking system and to bring together the banks willing to invest their short term excess cash with those willing to meet their short term cash needs without having to sell off their long term assets. In this market, the banks can carry out TL deposit purchase and sale transactions within their limits at predetermined maturities. Until 2 December 2002, the CBRT used to act as an intermediary (blind broker) in this market and the trading banks used to carry out their transactions via the CBRT (accepting the CBRT as a counterparty), without knowing each other’s identities. The CBRT’s gradual abandonment of its intermediary functions at the Interbank Money Market started on 1 July 2002 and was completed on 2 December 2002. Since then, the CBRT has been engaged in a kind of open market operation in this market by borrowing and lending TL deposits at its policy rates within the framework of the monetary policy in place. 

Relations with Institutions, Organizations and the European Union
What are the relations of the Central Bank with the European Union Institutions?

In the framework of Turkey’s EU membership process, the Central Bank of the Republic of Turkey (CBRT) has extensive bilateral relations with the EU institutions, primarily with the European Commission and the European Central Bank (ECB). The bilateral relation between the CBRT and the ECB has been continuing since 2002. In this context, regular “Senior-Level Policy Dialogue” meetings take place. These meetings build the highest-level dialogue mechanism between the two central banks through which economic and financial developments are evaluated mutually. Moreover, the Memorandum of Understanding signed between the two central banks in 2013 has moved these bilateral relations to a higher level. In the scope of this Memorandum of Understanding, various technical cooperation activities are carried out every year to enhance exchange of information and experience in the field of central banking. The CBRT participates in the European Commission’s meetings on the topics related to the Bank’s field of activity each year.

The CBRT also participates in European Economic Forecast meetings, which are held by the Commission twice a year in spring and autumn at the expert level in Brussels and which are used as a basis for periodic reports and statistics published annually regarding candidate countries.

The CBRT has also relations with the Economic and Financial Committee (EFC), which has an autonomous structure within the EU, yet which works in collaboration with the Commission. The EFC arranges annual three-stage meetings in Brussels. At these meetings, candidate countries’ economic dialogue strategies, which were previously called the Pre-Accession Economic Programmes (PEPs) but then changed into Economic Reform Programmes (ERPs), are evaluated and the final declaration, which is drafted to be adopted in the ECOFIN Ministerial Dialogue meeting, is shaped. The first stage of these meetings includes EFC expert level meetings. At these meetings, the ERPs of candidate countries submitted annually to the European Commission are evaluated. These meetings are technical level meetings with participants from EU member and candidate countries. The second stage includes the EFC High Level Economic Dialogue meetings which aim to improve economic policy dialogue between member and candidate countries. These are held once a year in Brussels before the ECOFIN Ministerial Dialogue meetings. The draft final declaration to be adopted at the ECOFIN meeting is finalized at this meeting. The draft declaration can be changed only to a very limited extent at this stage. The third stage is the ECOFIN meetings held once a year in Brussels that bring together the economy and finance ministers of EU member and candidate countries. The draft final declaration framed in the previous two meetings is approved by ministers at this meeting. The central bank governors have also been participating in these meetings since 2004. This meeting stands as the highest-level economic dialogue platform between EU member and candidate countries.

What is the Governors' Club?

The Governors’ Club is an organization established to promote bilateral relations, seek opportunities for technical cooperation in banking and financial fields, and foster exchange of information, coordination of education, and cooperation in the fields of finance and central banking between the member state central banks in Central Asia, Black Sea Region and the Balkans. The idea of establishing a Governors’ Club was first voiced by our Bank in 1997, paving the way for its foundation on 1 May 1998 with a protocol signed by the central bank governors of 10 countries including Turkey. Currently, the number of member countries is 25.

What is the relationship between the Central Bank and the Undersecretariat of Treasury?

According to Article 41 of Law No. 1211 on the Central Bank of the Republic of Turkey, the Bank, in its capacity as the fiscal agent of the Government, carries out the financial servicing of government domestic debt securities (GDDS) on behalf of the Treasury. In this framework, the Bank acts as an intermediary in the issuing of securities in the primary market and carries out repayment of matured securities. Moreover, the Bank, acting as Treasurer of the State, is responsible for executing all types of collections and disbursements of the State both within the country and abroad, as well as money transfers and remittances of all types free of charge. In addition, within the context of its mandate as the fiscal and economic advisor to the Government, the Bank serves as a consultant to the Treasury in financial and economic matters, primarily in the management of domestic debt. 

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