From 2002 to 2005, Turkey implicitly adopted an inflation targeting regime, under which short-term interest rates were used as the main policy tool. Then, in 2006, the central bank switched to explicit inflation targeting. Since late 2010, the Central bank of Turkey has followed one of the most unorthodox monetary policies among emerging markets, relying on a series of required reserve measures, as well as differential exchange rates to attract and retain capital while trying to avoid overheating. In October 2011, the Central Bank of Turkey shifted to an even more unorthodox policy by introducing an interest rate band as its primarily policy tool and providing financing at different rates each week depending on financial conditions. This corridor from 5.75% one-week repo rate and the overnight lending rate (12.5%, then dropped to 11.5%) allowed the CBT to bring effective rates up to over 10% to cool excess liqudity, credit growth and stabilize the lira (indirectly fighting inflation by avoiding imported inflation), without actually increasing the policy rate.
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