SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Central bank: tcmb | Type: decision | Date: 2006-03-31

No: 2006-15
March 31, 2006
SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Meeting Date: 23 March 2006
Inflation Developments
In February, the CPI index increased by 0.22 percent compared to the previous
month and 8.15 percent compared to the same period of the previous year. H ence,
inflation displayed a limited increase. Since this was an expect ed development as
described in the Inflation Report, inflation figures in February did not necessitate a
major change in the medium-term perspective of monetary policy.
In February, the increase in food prices was the main factor that affected
inflation negatively. The main determinant of these price increa ses, which registered
an increase above expectations, can be attributed to the prices of f resh vegetables,
which increased significantly due to adverse weather conditions. The 0.58 percentage
points of consumer prices, which increased by 0.97 percent in the first two months of
the year, was derived from fresh vegetable prices. This deve lopment is expected to be
temporary. It is also anticipated that the negative impact of the increase in food prices
on inflation will weaken in March. Meanwhile, clothing prices continue d to decline in
February due to seasonal impacts. The fact that winter sale discounts are higher in this
group compared to the previous year shows that demand and competition conditi ons
continue to support the decline in inflation. Clothing prices are expecte d to have a
positive impact on consumer prices in March owing to the VAT cuts m ade in the
textile, ready-to-wear and leather sectors from 18 percent to 8 pe rcent.
In February, the developments in the Special CPI Aggregates dis played a
positive outlook. Especially the special aggregates E, F and G, which exclude the
alcoholic beverages, tobacco products and energy items, maintained a downward
trend in the last three quarters and increases in the said indices remained below 7
percent. These developments indicate that the downward trend of inflat ion continues.
Although current inflation is above 8 percent, expectations regarding 2007 indicate
lower levels and support the downward trend of inflation.
Producer prices maintained their favorable course. Meanwhile, the increase
made in prices of natural gas used in industry has had a negative impact on production
costs. The annual increase observed in the manufacturing industry pric e index, which
is calculated by excluding petroleum and tobacco products, maintained its historically
low level.
The prices of services continue to be an important risk factor for the
attainability of the inflation target set for 2006. Services ite ms increased the said risk,
as their share in the CPI was increased by the updates in 2006. Mea nwhile, it should
be noted that the annual rates of increase in services items tha t are susceptible to oil
prices have displayed a downward trend. There is no doubt that the course of the rates
of increase in the said sub-items will depend on the course of crude oi l prices in the
upcoming period.
In light of these evaluations, it is foreseen that inflation wil l start to register a
downward trend as of the upcoming month.
Factors Affecting Inflation
In previous Monetary Policy Committee Discussions, the deterioration trend in
domestic demand and production indicators were mainly attributed to the v ery long
religious holiday. Meanwhile, the unfavorable trend in industrial product ion
exceeding seasonal factors is believed to have stemmed from natur al gas cuts in the
month in question. Actually, the favorable trend in production, volume of or ders from
the domestic market, volume of goods sold in the domestic market and v olume of
work in progress over the next three months signals that the slowdown i n demand and
production is not permanent. Moreover, according to the Manufacturing Indus try
Tendency Survey, the decline in the number of participants who stated that the reason
behind working below capacity was the lack of demand in the market. T he Real
Sector Confidence Index, which is an important indicator with respect to industrial
production, also maintained its stable trend in February. To sum up, data pertaining to
domestic sales of automobiles, vehicle loans, consumption indices and c onsumption
goods imports indicate that the stable course in demand and production indica tors
continues.
Although the stable trend in investment continues, recent developments i n
domestic sales of commercial vehicles and developments in sector s producing
machinery-equipment, office machinery, electrical machinery and electrical
appliances indicate that the rapid rise in investment expenditures m ight slow down in
the upcoming period. However, due to the reasons explained above, it should be borne
in mind that the developments in January and February might be temporar y. Actually,
despite the decline in production, the upward trend in imports of capital goods shows
that investment expenditures still continue. However, data to be rel eased in the
coming months will provide a clearer view.
Besides the data pertaining to investments in machinery-equipment, recent
developments in sectors providing intermediate input for the constructi on sector
points to the fact that the increased activity observed in the const ruction sector at the
beginning of 2005 slowed down relatively as of the second half of 2005. Howeve r,
when the level of production of non-metallic minerals, according to se asonally
adjusted data, and the strong demand for houses are taken into account, it is projected
that the rise in production in the construction sector will continue. The sustained rapid
rise in housing loans also supports this trend. When the data pertaining to housing
permits in the third quarter of 2005 are analyzed, it is observed that the rise in housing
construction continues. To summarize, even if no upward movement is obse rved in
the said data, indicators pertaining to machinery-equipment and construc tion sectors
provide information that the stable rise in investment demand would cont inue, at least
in the short-run.
One significant point regarding total demand developments is the fac t that
exports once again started to increase in March. The sustained upwar d trend in
expectations for the volume of goods to be exported in the next three months and new
orders received from the exports market according to the Business Te ndency Survey,
coupled with the leading indicators announced, signal that the rise in f oreign demand
will continue even if at a slower pace. Meanwhile, it is proje cted that the upward
trend in imports would also continue and the contribution of net foreign demand to
domestic added value would remain limited in the near future.
Although consumer loans maintain their high levels, the annual rates of
increase, excluding housing credits, displayed a stable trend in the last period. This is
considered to be an indicator of the stability of the increase in dome stic demand.
There is no doubt that the increases in housing credits, which stemmed from structural
factors, might continue in subsequent years. Moreover, the decline obs erved in the
public borrowing requirement in recent years is expected to continue to underpin both
the consumer and corporate credit supply. Rapid credit expansion is taken as a
development that should be monitored closely in terms of both price and fi nancial
stability.
To sum up, the evaluations regarding supply and demand conditions point to
the fact that the stagnation observed at the start of the year was temporary and that the
increase in total demand maintains its stable course. Although employment, excluding
the agricultural sector, has rapidly increased in a stable manne r since the second
quarter of 2004, the continuance of productivity increases in line with t he investment-
based growth and structural reform process restricts cost pressures. However, it is
expected that the support of supply and demand conditions in the disinflation proc ess
will be limited in the upcoming period compared to previous years.
Developments in crude oil prices stood as the leading factor in te rms of
production costs. In recent months, the continuation of the unforeseen volati lity in oil
prices confirms that oil prices remain as a significant risk factor in terms of the
achievability of the inflation target in 2006. Moreover, the fact that the International
Metal Prices Index registered high increases on an annual basis c onstitutes another
risk factor.
The risks to the inflation outlook arising from likely fluctuations in
international liquidity conditions and global risk appetite are always present. The
financing structure of the current account deficit has tended to grow stronger recently,
which means that the resilience to fluctuations in international liquidity conditions has
started to increase. Nevertheless, maintaining structural adj ustments in a determined
manner and avoiding implementations that would increase perceptions of unc ertainty
are still critical under current conditions.
Monetary Policy
In the light of the developments summarized above, the Monetary Polic y
Committee has concluded that recent developments, while supporting short- term
inflation forecasts, do not significantly change the medium-term out look outlined in
the Inflation Report. It is expected that the cut in Value Added Tax rates in the textile,
ready-wear and leather sectors, the ongoing productivity increases in the
manufacturing industry and the fact that the secondary effects of oi l price increases
continue to remain limited will favorably affect inflation in the short-term. In light of
these developments, it is estimated that the downward trend in annua l inflation will
resume starting in March, and end-year inflation will come closer to the point target
of 5 percent. However, the cautious approach of monetary policy should be
maintained in view of a likely increase in perceptions of uncertai nty over monetary
policy, the continuation of price rigidities in the service sector, the reduction of the
contribution of demand conditions to disinflation, and the continued high volatili ty in
costs of raw materials. Meanwhile, developments in international liquidity conditions
are being closely monitored.
In consideration of information currently available, policy rates a re less likely
to increase, rather than remain stable or decrease in the medium -term. In the near-
term, however, the likelihood of policy rates remaining stable se ems to have been
reduced somewhat since the last meeting. This policy perspective will ensure that
inflation is in line with the target path around mid-2007. On the other ha nd, it should
be emphasized that any new data and information associated with the i nflation
outlook will compel the Monetary Policy Committee to potentially re vise its stance
regarding the future.