SUMMARY OF MONETARY POLICY COMMITTEE
Central bank: tcmb | Type: decision | Date: 2006-11-01

No: 2006-48
November 01, 2006
SUMMARY OF MONETARY POLICY COMMITTEE
DISCUSSIONS
Meeting Date: 19 October 2006
Inflation Developments
1. Annual inflation in consumer prices reached 10.55 percent in September.
While high rates of increase in the prices of unprocessed f ood products
continued to affect inflation adversely, oil and gold prices have had a
favorable impact on inflation in September. Besides th ese factors, it is
considered that the effect of Ramadan was another deter minant factor of
September inflation, especially through the prices of p rocessed food
products. It is expected that this effect will continue in October price index
as well, but food prices might adjust in November.
2. Prices of food group have been playing an important r ole in the rise in
consumer inflation for the last one year-period. When the sub-items of this
group are analyzed, it is observed that the rise in th e prices of processed
food products accelerated recently due to the lagged eff ects of the rise in
exchange rates. On the other hand, the expected normal ization in the
prices of processed food products is not yet in place. The f act that the
prices of fresh fruits, which had decreased by12.9 percent cumulatively in
the first nine months of 2005, increased by 35.2 percent in the same
period in 2006 indicates that supply-side shocks are influe ntial in the
movements of the prices of unprocessed food products.
3. The effect of exchange rate movements on consumer durabl es decreased
in September. It is observed that such effects have alrea dy shown up on
prices of electrical and non-electrical appliances and auto mobiles to a
great extent, while the rapid rise in the prices of fu rniture group continues.
It is expected that the price inflation of the furnitu re group will decelerate in
the upcoming period as well, in line with the improve ment in cost
conditions and the slowdown in domestic demand.
4. High course of increase in the annual prices of services group continued in
September as well. In particular, house rents and hotel -accommodation
group prices continued to rise rapidly due to the backwar d indexation
behavior. It is predicted that transportation services pr ices, which are quite
susceptible to oil prices, will contribute favorably to t he inflation in the
upcoming period.
5. The annual rise in Special CPI Aggregate excluding the prices of energy,
unprocessed food products, alcoholic beverages, tobacco produ cts and
gold, which has started to be published as the “ÖKTG-H i ndex” by
TURKSTAT beginning from September, continued to accele rate. As this
development had already been foreseen by the Central Bank, it was not
perceived as new information that could affect the mone tary policy
decision-making process. As the share of durable goods in th is index is
quite high, it is affected considerably by the fluctuati ons in the exchange
rates. Although, it is predicted that, due to the impr ovements in the cost
factors and the deceleration of domestic demand, the monthly increases of
the aforementioned indicators will tend to slow down i n the upcoming
months, the high course of the annual increases is expected to continue
for the time being.
Factors Affecting Inflation
6. There is a significant deceleration in the demand for p rivate expenditure
groups such as durable goods and housing that are responsiv e to interest
rates. Moreover, developments in credit aggregates confi rm the slowdown
in the domestic demand. Especially, increase in consumer loans lost pace
in the recent months. While housing loans and credit card s show a
moderate increase, automobile credits are in a decreasing trend. The
increase in the total consumer loans mostly stemmed from t he loans,
which are extended in low amounts with shorter maturit y but higher
interest rates compared to the housing and automobile loans.
7. External demand is relatively strong, albeit not as mu ch as expected. The
continued increase in partial productivity and the rela tively robust world
economy continues to support the rise in exports.
8. Public sector incomes policy is another important factor fo r the medium-
term inflation outlook. Increase in the wages of public sector has a crucial
role in shaping the inflation expectations. According to the national income
statistics announced by the TURKSTAT, almost half of the labor force
payments come from the public sector. Thus, wages in the p ublic sector
are also important with regard to the demand-push eff ects. Within this
framework, the wages awarded to the civil service servant s for 2007 will
not be able to support the disinflation process.
9. Due to the persistence of the increase in productivity and the rise in wages
remaining limited, the decline in the unit labor costs in the private
manufacturing industry continued. Compared to the same period in the
previous year, the unit labor costs decreased by 8.1 perce nt in the second
quarter of 2006. However, in case the increase in the r eal wages of the
public sector in the upcoming period becomes a precedent f or the private
sector, the decline in the real unit wages of the priva te manufacturing
industry will be lower compared to the previous periods.
10. It is considered that the deceleration in aggregate dem and in the second
half of the year will be limited due to both the hi gh level of increase in
public expenditure items and the relatively strong cour se of the net foreign
demand. Thus, although the industrial production in Jul y and August and
the seasonally adjusted data on capacity utilization rat es of the July-
September period are at lower levels compared to the second quarter of
the year, they do not point to a significant slowdown in economic activities.
In addition, Committee members evaluated that the pa st policy measures
had not been significantly effective on economic activity yet and that the
lagged effects should be monitored closely in the upcoming months.
11. The continuation of the improvement of inflation exp ectations is
considered as a favorable development. Nonetheless, the fact that
medium term inflation expectations continue to remain high above the
targets necessitates the monetary policy to preserve its cautious stance.
12. Rapid increases in oil prices came to a halt in recent months. As a result of
these developments, the price increases in transportation services lost
momentum. However, the fact that there will be some l agged effects of the
past increases in oil prices on natural gas and electricity prices indicate
that energy prices will continue to affect inflation un favorably in the
upcoming period.
Monetary Policy and Risks
13. The medium term inflation target of the Central Bank is set as 4 percent. In
order to achieve this target, monetary policy instrumen ts will be used
effectively. Nevertheless, there exist important risk fact ors that might slow
down the disinflation process in the upcoming period.
14. Committee members highlighted the fact that the curren t level of the credit
interest rates, which are the most important determinan t of domestic
demand, is considerably high compared to the first half of 2006 and
assessed that this development will continue to constrain t he credit
demand of individuals and firms in the upcoming period . However,
considering the facts that the impact of the upward tren d of non-interest
public expenditures on the 2007 inflation is not clear and there exist other
uncertainties regarding the monetary transmission mechani sm, it should
be borne in mind that the disinflation process may mate rialize at a slower
pace than anticipated. In case such a risk materializes, in terms of
achieving the medium term targets, it might be necessary to maintain the
current tight stance of the monetary policy for a long time.
15. The likely changes in global risk appetite and the new f luctuations that
might emerge in financial markets continue to be one of the main risk
factors that might deteriorate the inflation outlook. The available indicators
regarding the US economy point to a gradual slowdown. This has
contributed to the improvement in the short-term infl ation outlook by
limiting the increases in oil prices. On the other hand, it should be taken
into account that a rapid slowdown in the US economy mo re than
expected may lead to a temporary deterioration in th e risk appetite. In
case such a risk materializes and the medium-term expectati ons are
affected unfavorably, the CBRT will not hesitate to t ighten monetary policy
through effective liquidity management or policy rate revisions.
16. Risks that may arise from high course of medium-term infl ation
expectations and the persistence of the backward-looking pr icing behavior
in the services group stand as another factor leading to uncertainties in
terms of inflation outlook. The services inflation, which is currently around
12 percent, is anticipated to decrease further in a certa in extent next year
in line with the slowdown expected in domestic demand. However, the
possibility that the stickiness in services inflation may be higher than
expected, due to the continuation of backward-looking pr icing behavior
and other structural factors emerges as a risk element. The fact that
incomes policy set for 2007 stipulates high increases in wag es augments
the risks regarding services prices.
17. As a result, the Committee has decided to keep policy rat es unchanged
and maintain the current cautious stance. However, the f actors such as
the continued presence of a gap between the medium-ter m inflation
expectations and the targets, the emergence of new risks r elated to
services prices and the continuation of uncertainties in the global economy
necessitate the monetary policy to remain cautious in the medium term.
18. In light of these developments, the Committee perceive s that maintaining
the cautious stance is necessary for the inflation rate to converge to the
2007 year-end targets. The Committee closely monitors t he lagged effects
of the monetary tightening that has been carried out since June. In
addition, the impact of the incomes policy and the non- interest public
sector expenditures on the 2007 inflation are closely mo nitored as well.
The CBRT will not hesitate to tighten monetary polic y, in case
developments with unfavorable effects on medium-term i nflation outlook
are observed.
19. The continuation of the European Union accession process an d the
uninterrupted implementation of the structural reform s envisaged in the
economic program as planned are still crucial in terms of medium and
long-term outlook. Continued determination in implem enting the decisive
steps taken in these areas will help the economy to overco me the adverse
changes in the international conjuncture at minimum cost.