SUMMARY OF THE MONETARY POLICY COMMITTEE MEETIN G
Central bank: tcmb | Type: decision | Date: 2009-09-17

No: 2009 – 29
01 October 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETIN G
Meeting Date: September 17, 2009
Committee Members
Durmu ş Yılmaz (Governor), Erdem Ba şçı, Burhan Göklemez, Turalay Kenç,
M. İbrahim Turhan, Abdullah Yavaş, Mehmet Yörüko ğlu.
Inflation Developments
1. Consumer prices decreased by 0.30 percent in Aug ust, bringing inflation down
to 5.33 percent year-on-year. Core inflation measur es remained low, while the
annual rate of increase in the prices of services continued to fall steadily.
2. The rate of increase in food prices dropped by 1 .67 percentage points month-
on-month to 6.83 percent year-on-year, on the back of easing unprocessed
food prices, owing to falling vegetable and fruit p rices. In the processed food
category, prices continued to decline year-on-year, however, annual inflation
across this category is likely to increase owing to base effects in coming
3. Energy prices increased by 1.88 percent in Augus t. Fuel prices jumped by
5.02 percent due to the lagged impact of the mid-Ju ly Special Consumption
Tax hike and rising oil prices. Moreover, the incre ase in tap water rates drove
energy prices higher.
4. The annual rate of increase in the prices of goo ds excluding energy and food
climbed to 5.70 percent in August, owing to the ris e in annual clothing inflation
and the monthly increase (1.83 percent) in prices o f durable goods (excluding
gold) and tobacco products. The seasonal discounts on clothing prices have
been more modest than a year earlier because of the relative increase in
clothing demand. Meanwhile, the annual inflation in durable goods (excluding
gold) increased to –1.71 percent amid rising prices of white goods and
automobiles. It should be noted that the tax cuts a re due to expire in October,
which will likely put upward pressure on annual dur able goods inflation in the
upcoming period.
5. Given the weak state of domestic demand and the gradual removal of the high
base effect of the past supply shocks, the steady f all in services prices over
the past year continued into August, bringing the i nflation rate in this category
down to 5.59 percent year-on-year. Across subcategories, inflation in transport
services, rents, as well as restaurants and hotels continued to fall gradually.
Annual services inflation is expected to edge further down over the short run.
6. Overall, the Monetary Policy Committee (the Comm ittee) noted that underlying
inflation continues to hover around low levels.
Factors Affecting Inflation
7. Second quarter national accounts data are consis tent with the outlook
discussed in the July Inflation Report. Gross Domes tic Product (GDP)
continued to decline year-on-year, but rose sharply quarter-on-quarter in
seasonally adjusted terms, signaling that the econo mic contraction since the
second quarter of 2008 has ended. Domestic demand i ncreased on rising
private consumption during the second quarter, and net exports continued to
register a positive contribution to growth, albeit more modestly.
announcements, the Committee reiterated that consum er spending was
mainly boosted by the fiscal stimulus packages, and thus the observed
recovery may reflect transitory features. Among maj or spending categories,
the demand for goods that benefited from the fiscal measures recovered
rapidly during the second quarter: spending on furn iture, household
appliances and care, as well as transport and commu nications rose markedly
quarter-on-quarter in seasonally adjusted terms. By contrast, the demand for
categories that were not affected by the fiscal incentives remained flat.
9. Consumption demand, after having increased marke dly during the second
quarter, is expected to display a weaker course in the third quarter. In fact,
indicators including the sales of white goods, the quantity of imported
consumer goods, consumption indices and automobile sales are running
below their second quarter levels in seasonally adj usted terms. Moreover, the
indicators of market orders and consumer confidence from the Business
Tendency Survey seem to reinforce this outlook.
10. Domestic investment demand remains weak. Despit e the marked run-up in
consumer demand during the second quarter, private machinery and
equipment investments continued to fall quarterly, indicating that demand
uncertainty remains strong over the upcoming period s. Imports of capital
goods declined in July from a quarter earlier, whil e the Business Tendency
Survey indicator of expected future fixed capital i nvestment spending points to
a further year-on-year decline in private sector in vestments. The Committee
noted that low capacity utilization rates and uncer tainties over aggregate
demand will likely further weigh down on investment demand.
11. Foreign demand continues to be weak. The export quantity index continued to
fall year-on-year in July, but increased sharply mo nth-on-month in seasonally
adjusted terms. Leading indicators suggest that exp orts continued to grow in
August and September, albeit at a slower pace. The Committee noted that
exports are expected to recover gradually, matching the pace of global
economic recovery, and reemphasized that foreign de mand is therefore likely
to remain anemic for quite some time.
12. In July, industrial production increased month-on-month in seasonally adjusted
terms, running above its second quarter average. Th e uptrend in capacity
utilization rates since April continued into August . The manufacturing industry
capacity utilization rate and recent export data su ggest that the moderate
recovery in industrial production is likely to cont inue into August and
September.
13. Uncertainties regarding aggregate demand remain high and continue to
adversely affect labor markets. Specifically, labor market conditions do not
display a significant improvement. During May-July, non-farm employment
dropped by 2.5 percent year-on-year, while non-farm unemployment increased
by 4.5 percentage points to 16.4 percent. In season ally adjusted terms, while
non-farm unemployment fell slightly quarter-on-quar ter, the decline was
because of a drop in labor participation rate rathe r than a recovery in
employment. Moreover, employment losses are still a pparent across industrial
sectors in seasonally adjusted terms, indicating th at the labor market has yet
to recover. Looking ahead, leading indicators do no t point to a marked
recovery in employment conditions during the third quarter.
Monetary Policy and Risks
14. Committee members have indicated that the futur e course of monetary policy
will largely depend on the strength of the recovery in economic activity.
Although second quarter GDP figures seem to reflect a bounce-back in private
consumption, inspection of the subcomponents reveal s that the increase in
consumption is confined to goods that were subject to tax incentives within the
fiscal package, suggesting that a durable recovery has yet to materialize. As a
matter of fact, recent data releases indicate that, in line with the Committee’s
previous assessments, the ongoing recovery in econo mic activity will be
gradual and protracted. Accordingly, resource utili zation in the economy is
anticipated to stay below potential for an extended period, and therefore, in
line with the perspective outlined in the Inflation Report, inflation is expected to
remain at low levels for a long period of time.
15. Provided that the improvements in global risk p erceptions continue, the
Committee expects that the cumulative policy rate c uts implemented since
November 2008 would begin to have an effect on cred it markets over the
forthcoming period. In this context, consumer loan rates have been falling
steadily since the publication of the July Inflatio n Report. Also during this
period, banks’ willingness to extend credits have b een increasing markedly,
and tightness in financial conditions have been eas ing. These developments
suggest that the credit channel would start to be more effective going forward.
16. However, the weakness in labor markets is ongoi ng and lingering problems
across the global economy have not been resolved co mpletely, suggesting
that there are still uncertainties regarding the st rength of the recovery. In this
respect, the Committee members stated that the impr ovement in credit
conditions would not in itself be enough to end the easing cycle. Yet, given the
increased perceptions that the economy had reached a turning point, it was
concluded that a slowdown in the pace of rate cuts might be considered,
keeping the options open depending on incoming information.
17. Overall, the Committee has reiterated that it w ould be necessary for monetary
policy to maintain an easing bias for a long period of time. The size and the
duration of the rate cuts would depend on the pace of the recovery in
economic activity.
18. Another factor affecting the outlook for moneta ry policy would be changes in
risk perceptions. The global crisis has highlighted the resilience of the Turkish
financial system, leading to an improvement of our relative creditworthiness.
Provided that the global risk appetite continues to improve in the forthcoming
period, this could lead to a decline in imported in flation through the portfolio
channel, increasing the probability of significantl y undershooting the inflation
targets. Under such circumstances, the Central Bank of Turkey (CBT) would
react by extending the easing cycle more than was e nvisaged in the Inflation
19. An important factor that may affect the risk premium is fiscal policy. Should the
framework outlined in the Medium Term Program be su pported by structural
adjustments which enhance fiscal discipline, the im provements in sovereign
credit risk might continue, which in turn, would in crease the probability of a
further decline in interest rates. In sum, further improvements in the risk
premium may lead to a longer rate cut cycle.
20. The CBT has been taking the necessary measures at its disposal to contain
the adverse effects of the global crisis on the dom estic economy. Monetary
policy in the past year has focused on alleviating the impact of the global
financial crisis on the economic activity. In this respect, the CBT has delivered
sizeable cuts in policy rates, while providing liqu idity support to facilitate the
smooth operation of credit and financial markets. P rudent monetary policy is
necessary but not sufficient to maintain the resili ence of the economy against
the global crisis. Therefore, strengthening the com mitment to fiscal discipline
and the structural reform agenda is also critical f or facilitating expectations
management and for supporting the effectiveness of the monetary policy
decisions. In this respect, timely implementation o f the structural reforms
envisaged by the Medium Term Program and European U nion accession
process remains to be of utmost importance.