SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-11-19

No: 2009 – 35
02 December 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: November 19, 2009
Inflation Developments
1. Consumer prices surged by 2.41 percent in Octobe r, while inflation declined to
5.08 percent year-on-year. October price developmen ts coincided with the
outlook presented in the Summary of the September M onetary Policy
Committee Meeting. While annual inflation decreased, monthly inflation picked
up dramatically due to seasonal price hikes in food and clothing, renewed
electricity tariffs and tax adjustments on durable goods.
2. The annual rate of increase in food prices fell to 5.82 percent in October.
Lower exports of fruits and vegetables brought annu al food inflation down,
while soaring meat prices put upward pressure on food and catering prices.
3. Energy prices rose by 2.50 percent in October, o f which the hikes in residential
electricity tariffs accounted for 2.30 percentage p oints. Consequently, the rise
in energy prices added about 0.35 percentage points to CPI inflation. Despite
having edged up since May, energy prices still hove r around the year-ago
4. Prices of durable goods were up 4.24 percent in October following the
expiration of the temporary tax cuts. Adjusted for changes in taxes, the rate of
increase in durable goods appears to remain subdued and stable.
5. Annual services inflation, which was on a contin uous declining path in the last
one year, displayed a modest increase in October. H owever, the assessment
of the subcategories indicates that this developmen t would not adversely
affect the broader outlook. Although, seasonally ad justed monthly increase in
services inflation is higher than the levels regist ered during the first quarter
(when the effects of the economic slump on inflatio n was most significant), it
remains well below the pre-crisis average.
6. Overall, adjusted for tax changes, core inflatio n measures suggest that
underlying inflation continues to run at low levels.
Factors Affecting Inflation
7. In line with the Monetary Policy Committee’s (th e Committee) previous
assessments, recent data releases indicate that the ongoing recovery in
economic activity would be gradual and protracted. During the third quarter,
average industrial production was slightly up from the second quarter, in
seasonally adjusted terms. While October’s capacity utilization data indicate
that production continues to grow modestly, conside rable slack remains. The
Committee emphasized that the recovery in productio n is slow, and noted that
the support of the fiscal measures to the productio n has been limited at this
stage, and that underlying economic activity is sti ll weak. Against this
backdrop, the Committee reiterated that the current pace of economic
recovery would not put upward pressure on inflation, as it implies low resource
utilization for quite some time.
8. Consumption demand has displayed a weaker course , after having increased
markedly during the second quarter. Production in n on-durable goods, which
was not targeted by the fiscal stimulus, continued to contract in September,
also partly owing to the significant income effect. Accordingly, consumer
goods production fell quarter-on-quarter in seasona lly adjusted terms during
the third quarter, while imports of consumer goods rose at a more moderate
pace than in the second quarter. Production and imp orts data suggest that
consumption demand was essentially flat in the thir d quarter. Moreover,
following the expiration of the tax incentives in O ctober, indicators point to
further weakening in domestic demand. The lack of d omestic demand
continued to increase as a factor restraining capacity utilization during October
in seasonally adjusted terms, and at the same time, consumption indices
declined significantly month-on-month.
9. Domestic investment demand remains weak. Excludi ng transport vehicles, the
production of capital goods flattened out during th e third quarter in seasonally
adjusted terms. A similar pattern was also observed in capital goods imports.
Taken together, these indicators suggest that, desp ite a slight quarterly
rebound in the third quarter, private machinery and equipment investments
remain at low levels. The Committee restated that t he current demand
uncertainty and idle capacity might continue to hav e a dampening effect on
investment.
10. Foreign demand remains weak. The export quantit y index dropped by 11.8
percent year-on-year during the third quarter, but was up quarter-on-quarter in
seasonally adjusted terms. October and November dat a indicate that exports
continue to recover modestly.
11. Another factor restraining capacity utilization has been the weak demand in
foreign markets. Although this adverse impact has b een easing since June,
owing in particular to the improved outlook for eur o area growth and new
export market opportunities, it remains to be seen whether the recent
improvement in the foreign demand outlook is sustai nable. Committee
members noted that the global economic recovery dri ven by fiscal and
monetary expansion packages since the second quarte r of 2009 might lose
momentum with the gradual withdrawal of these measu res. Thus, the
Committee indicated that it would take quite a long time for foreign demand to
return to pre-crisis levels.
12. Employment conditions are likely to take a long time to fully recover. In fact,
having declined during the past two months in seasonally adjusted terms, non-
farm unemployment rose again month-on-month during July-September
period. Accordingly, non-farm unemployment climbed to 17 percent in the third
quarter, which is 4.1 percentage points higher comp ared to the previous year.
Applications for unemployment benefits remained at high levels in October,
indicating that unemployment would remain elevated during the final quarter.
In view of the current economic outlook, the Commit tee maintained the view
that it would take a long time for the employment conditions to fully recover.
Monetary Policy and Risks
13. The Committee, in light of the assessments summarized above, reiterated that
resource utilization, and thus inflation, would con tinue to hover around low
levels. While headline annual inflation could displ ay some upward movements
through mid-2010 due to strong base effects, it was reemphasized that this
possibility had already been reflected in the monet ary stance outlined in the
October Inflation Report. Accordingly, the Committe e indicated that the
monetary policy stance outlined in the Inflation Report has not changed.
14. The policy rate cuts implemented since November 2008, and the
improvements in global risk perceptions have starte d to exert favorable effects
on credit markets. Although the recent Banks’ Loan Tendency Survey
suggests that banks are still cautious in extending loans, there are signs of
easing lending standards, especially in consumer lo ans. The Survey also
reveals the expectation of a continued recovery in credit demand. However,
the effectiveness of the credit channel in supporti ng economic activity has
been somewhat restrained owing to the ongoing tight ness in lending
standards for small- and medium-sized enterprises and for longer-term loans.
15. Although recent data releases indicate that the worst is likely to be over,
concerns regarding the strength of the global recov ery remain. In particular,
ongoing problems in credit and labor markets pose d ownside risks for global
activity. Should global conditions deteriorate agai n, and consequently delay
the domestic recovery, another cycle of rate cuts w ould be considered. Given
the lingering problems across the global economy an d the ongoing uncertainty
regarding the strength of the recovery, the Committ ee reiterated that it would
be necessary for the monetary policy to maintain an easing bias for a long
period of time. Moreover, the Committee emphasized that policy rates had
been cut by 1025 basis points since November 2008, and thus, rather than
focusing on the level of the policy rate in the cur rent circumstances, it would
be more important to keep rates at low levels for a n extended period.
Therefore, it was indicated that future rate decisi ons would be conditional on
economic data and developments.
16. According to the Committee members, another pos sible scenario involves a
surge in capital inflows to emerging markets owing to the relative improvement
of credit risk across these countries. Ample liquid ity driven by the
expansionary fiscal and monetary policies on a worl dwide scale, coupled with
rising risk appetites, have led to large capital in flows to emerging markets.
Current slack in the economy would imply that a fal l in the cost of imported
inputs could be rapidly transmitted to consumer pri ces, suggesting that a
further acceleration in capital inflows may exacerb ate downward risks on
inflation. Realization of such a scenario could lea d to temporarily lower policy
developments closely while formulating monetary pol icy. Enhancing the
framework set out in the Medium Term Program (MTP) through further
structural adjustments to strengthen fiscal discipl ine, would support the
improvement of Turkey’s sovereign risk. Should the goals set out in the MTP
be implemented, it would be possible to keep policy rates at single digits
throughout the forecast horizon.
18. The course of oil and other commodity prices co nstitutes another important
risk factor. Ample liquidity driven by countercycli cal policies on a global scale
has encouraged speculative investments not only int o emerging market
currencies, but also into commodities. Therefore, o il and other commodity
price developments warrant careful surveillance, ev en under a scenario of a
gradual global economic recovery. Nonetheless, weak domestic demand
conditions would limit the pass-through stemming fr om upside cost-push
shocks. Therefore, the Committee will not react to short-term commodity price
volatility, especially when resource utilization re mains at depressed levels.
However, if an uptrend in commodity prices reflects a strong and durable
rebound in global activity that would in turn creat e inflationary pressures, then
monetary policy will react appropriately to keep in flation in line with the
medium-term inflation targets.
19. The CBT has been taking the necessary measures to contain the adverse
effects of the global financial turmoil on the dome stic economy. However,
prudent monetary policy is necessary, but not suffi cient to maintain the
resilience of the economy against the global crisis . Therefore, strengthening
the commitment to fiscal discipline and the structu ral reform agenda is also
critical for facilitating expectations management a nd thus for supporting the
effectiveness of the monetary policy decisions. In this respect, timely
implementation of the structural reforms envisaged by the Medium Term
Program and European Union accession process remain s to be of utmost
importance.