SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-05-24

No: 2007- 12
24 May 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 14 May 2007
Inflation Developments
1. Consumer prices increased by 1.21% in April, bringing annual inflation down
to 10.72%. Yet, the surge in clothing prices restrained the decline in inflation
despite the considerable slowdown in inflation of consume r durables and
2. The rise in the annual inflation of clothing and f ootwear can be attributed to the
recent cost-driven hikes in apparel manufacturing prices. R ecent course in
clothing and footwear prices suggest that the price developments in this group will
contribute less to the disinflation process in 2007 compared to 2005 and 2006. On
the other hand, the prices of durable goods exhibited a favorable outlook in April,
possibly owing to the strength of Turkish lira as well as the slowdown in domestic
3. Recent price developments suggest that services inflatio n has been easing,
albeit modestly. Annual services inflation dropped to i ts lowest level since
September 2006. Monthly hikes in services prices from Janua ry to April fell
behind the year-ago levels of the same period. Along with the slowdown in
domestic demand, services inflation is expected to decline further gradually in the
upcoming period, yet, the Monetary Policy Committee ( the Committee) considers
that this improvement may be limited given the backwar d-looking pricing
behavior, the high-sensitivity of service prices to wage hikes and the relatively low
productivity in this sector.
4. Monthly inflation in the housing utilities continue d to ease in April. On the other
hand, prices of petroleum products re-accelerated by a 6. 13% rise in the last two
months, slowing down the decline in headline inflation.
5. Although clothing prices displayed a sharp rise in Apr il, the favorable
developments in prices of durable goods and services pulle d the annual inflation
of all special CPI aggregates down. With the disappeara nce of the exchange rate
pass-through effect of May and June 2006, the downward trend in the annual rate
of increase of H index will be further noticed in the upcoming period.
6. Unprocessed food prices continued to rise dramatically, at a rate of 16.63%
per annum. Fruit prices soared by 42.52% in the first f our months of 2007, up
from an average 3% monthly rise for the same period i n 2005 and 2006. Due to
warm weather conditions beyond seasonal norms, the declin es in fresh vegetable
and fruit prices, which normally take place in the summer season, may shift from
June to May. Moreover, exchange rate movements and the subsequent pass-
through in May 2006 constitute a high base on the consum er price index. In this
regard, the Committee noted that a partial correction in unprocessed food prices,
and the base effect may contribute to the decline in an nual inflation in May.
7. In light of these developments, the Committee assessed that the awaited signs
of disinflation have emerged in April and that the d isinflation trend will be more
significant in the upcoming period.
Factors Affecting Inflation
8. The Committee identifies the recent data on economi c activity as broadly
consistent with the outlook presented in the April Inflation Report.
9. The slowdown in private consumption demand continues . Consumer credits
exhibit a pattern as outlined in the inflation repor t. Automobile loans continue to
decrease in real terms. Housing loans are on a rise, albe it at a modest pace.
Personal expenditure loans, on the other hand, continue to increase at a relatively
higher rate but do not reveal a notable acceleration. Despite a limited fall
observed recently, bank loan rates are still above the p revious year’s levels and
continue to curb credit expansion.
10. Leading indicators suggest that the slowdown in dome stic demand continues.
Sales of automobiles and white goods fell in the first quarter of 2007 in seasonally
adjusted terms. Falling domestic automobile sales in Apri l signify that the private
demand may continue to slowdown in the second quarter. The Committee judges
that tightened financing conditions and growing uncerta inties will continue to
suspend the durable goods demand.
11. Foreign demand remains robust. The strong export p erformance compensates
the negative impact of the slowdown in domestic demand on overall economic
activity. Exports in the first quarter prevailed over imports in real terms. Leading
indicators of April and May suggest that the strong export performance continues.
12. The robust external demand supports industrial prod uction. As suggested by
seasonally adjusted data, industrial production displayed a flat course in the first
quarter. Despite the ongoing stability in industrial p roduction, the fact that last
year’s production was highly volatile may lead to fluct uations in annual growth
rates. Indeed, industrial production rose sharply by aro und 7.8% in the first
quarter of 2007 owing to the base effect of last year’s first quarter; however, in the
upcoming months, it may display low annual growth rate s due to high base in the
second quarter of 2006.
13. Imports of capital goods rose in the first quarter, whereas machinery-
equipment investments were restrained by the low course of light commercial
vehicle sales. April figures suggest that the slowdown in commercial vehicle sales
continues. Production and import data on non-metallic m inerals, on the other
hand, do not refer to any significant slowdown in construction activities.
14. In sum, the recent data confirm the outlook presente d in the April Inflation
Report. Aggregate demand conditions continue to support disinflation. Demand
for durable goods and machinery-equipment investment co ntinue to ease, while
strong external demand moderates the slowdown in overall economic activity.
15. The growth rate in services employment decelerated in the last three quarters.
This trend is in line with the slowdown in economic activ ity. Moreover, industrial
production remained relatively strong while industrial employment displayed a
slowdown, suggesting that labor productivity continued to rise.
16. The recently elevated prices of crude oil and commod ities add to the
inflationary pressures via imported input costs and thus cu rb the disinflation
process. These price movements are closely monitored.
17. Market expectations for end-year inflation increased slightly in April, possibly
due to higher-than–expected inflation outturns. Howev er, the medium-term
inflation expectations have not deteriorated. Inflati on expectations for the next 12
months have been improving modestly since early 2007, w hile those for the next
24 months stayed flat at around 5.5% in general. Medi um-term expectations
should move downward as the disinflation process accelerate s in the upcoming
Monetary Policy and Risks
18. Global bond issues of foreign financial institutions in YTL and the robust
privatization revenues have been increasing the supply of loanable funds. These
developments exert a downward pressure on bank lending rates. However, the
tight stance of monetary policy and the ongoing percept ions of uncertainty
continue to restrain the demand for credit. Accordingly, consumer credits are
expected to maintain their modest course in the upcoming period.
19. Other monetary indicators also display a similar out look. Specifically, the
gradual slowdown in the annual growth of banknotes in circulation since the
second half of 2006 is noteworthy. However, the inform ation included in monetary
indicators should be handled with caution due to possible shifts in money demand
arising from changes in portfolio preferences or financial system deepening.
20. The ongoing slowdown in private consumption and in vestment demand reveal
that the monetary tightening since June 2006 is affecting the domestic demand as
expected. Against this background, disinflation is expected to become more
significant in the upcoming period. However, there are some remaining risks to
the inflation outlook:
21. Possibility of stronger-than-expected inertia in in flation poses a significant risk
for the medium-term inflation outlook. Currently, me dium-term inflation
expectations are not aligned with the targets. Althoug h, the Committee expects
the decline in inflation to deliver an improvement i n inflation expectations in the
period ahead, the current course of expectations continue s to pose a significant
risk to the inflation outlook through wage and price setting behavior.
22. Uncertainties over the lagged effects of monetary p olicy stand as a major risk
to inflation outlook. The monetary tightening since Jun e 2006 is affecting the
domestic demand as expected. The lagged effects on inflat ion are yet to be seen.
Although the rate of increase in durable goods and serv ices prices decelerated in
the recent period, these developments do not provide e nough evidence to claim
that the current inflation trend is in line with medi um-term targets. In addition, the
course of non-interest budget expenditures exacerbates th e uncertainty over the
lagged effects of monetary policy.
23. Recently, the developments on international liqui dity conditions and global risk
appetite have been in favor of developing countries. However, ongoing
uncertainties concerning global economy and volatile comm odity prices pose risk
to inflation. Should any such shock threaten the medium- term inflation outlook,
the Central Bank will react depending on the source of the shock.
24. The Central Bank does not respond to temporary flu ctuations in inflation.
Decisions of the Monetary Policy Committee are based on an overall evaluation
of all factors affecting medium-term inflation, rather than temporary fluctuations in
inflation. In other words, the Central Bank decisions ar e focused on achieving
consistency between medium-term inflation and the targe ts. In this regard,
although disinflation is expected to become more signifi cant in the upcoming
period, the Committee, with a medium term perspective , decided to keep the
policy rates unchanged against the risks such as the gap betw een inflation
expectations and targets, the backward looking pricing beh avior, elevated oil
prices, prevailing uncertainties, and the stickiness related to services price
inflation.
25. Moreover, the potential impacts of the progress in the structural reform agenda
and the developments in incomes policy as well as public se ctor non-interest
expenditures on inflation and inflation expectations are carefully evaluated. Within
this framework, the Committee assessed that meeting the m edium term inflation
targets requires the maintenance of the tight policy stance.
25. Prudent monetary policy is necessary but not sufficien t for achieving price
stability. The role of fiscal policy and structural refor ms are also critical in this
process. Developments in structural reforms that would enh ance the quality of
fiscal discipline are closely monitored both in terms of m acroeconomic stability
and price stability. The European Union accession process an d the sustained
implementation of the structural reforms envisaged in t he economic program also
remain to be of concern. Continued determination in i mplementing the decisive
steps taken in these areas in recent years will strengthen the resilience of the
economy against possible changes in the global economy.