SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-09-18

No: 2008-24
29 September 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: September 18, 2008
Inflation Developments
1. Consumer prices fell by 0.24 percent in August, bring ing inflation down to
11.77 percent year-on-year, largely owing to a reduct ion in annual food price
inflation. Despite the fall in fuel prices, hikes in nat ural gas and water rates
increased annual energy price inflation. The contributi on of food and energy
prices to annual inflation was down by 0.5 points from July to 7.7 percent in
2. The Monetary Policy Committee (the Committee) assesse d that favorable
outlook in food prices and the sharp decline in oil price s will support
disinflation.
3. The annual rate of increase in food and non-alcohol ic beverage prices
decelerated by 2 percentage points to 13.33 percent. Wi th the ongoing
correction in fruit and vegetable prices, annual inflati on in unprocessed food
prices slowed down to 0.68 percent in August. The favorab le trend in
unprocessed food prices is expected to continue in the forthcoming period.
4. The relative slowdown in processed food prices has become more significant
in August. Recent decline in prices of bread and grains a s well as oil and fats
has been supporting the downward trend in processed food inflation. Given
the downward trend in processed food prices and the low base from last year,
annual inflation in processed food prices is expected to ea se markedly in
September.
5. The Committee observed that, since the release of the latest Inflation Report,
food prices have been following a more favorable course t han envisaged,
thanks to improved agricultural productivity and lower in ternational prices.
Food inflation is expected to continue to ease in the remainder of the year.
6. Energy price inflation climbed up to an annual rat e of 27.38 percent. Despite
the recent fall in oil prices, the cumulative past increase s continue to put
upward pressure on energy prices. The hike in prices of natural gas, water and
solid fuels in August is a case in point. Moreover, the im pending hike in
electricity tariffs, effective October 1, and the potenti al rise in natural gas
prices indicate that energy prices will continue to restra in the disinflation in the
short term. The hike in electricity tariffs is likely to co ntribute 0.23 percentage
points to CPI inflation in October.
7. The annual inflation in prices of goods excluding ene rgy and food remained
unchanged from July, at 4.19 percent. Seasonal discounts i n August were
relatively limited compared to July, pushing clothing pr ice inflation up by 1.2
percentage points year-on-year. On the other hand, th e strengthening of the
new Turkish lira and the weak domestic demand brought an nual inflation in
durable goods down by 1.6 percentage points from July. Meanwhile, prices of
pharmaceuticals rose by 4.64 percent, while gold prices we re down 11.05
percent in August.
8. On the services front, lagged impacts of supply shocks conti nued to put
upward pressure on prices of transport and catering services. Nevertheless,
the Committee noted that the monthly rate of increase in catering prices have
recently slowed down, which should become more pronounced as food prices
ease further. Inflation in communication services, which we re up 4 percentage
points year-on-year on account of the base effect and soa ring fixed-line tariffs,
were the main driver of the rise in annual services infla tion in August. Rental
inflation, on the other hand, remained on a steady decline.
9. Although the inflation measured by the widely cite d core CPI indexes, denoted
by H and I, went slightly up year-on-year due to the base effect and the lagged
impact of supply shocks, seasonally adjusted figures suggest a downward
trend in underlying inflation.
Factors Affecting Inflation
10. Recent readings indicate a significant slowdown in domestic economic activity.
Gross Domestic Product (GDP) grew by 1.9 percent in the se cond quarter of
2008 in annual terms, but displayed a 0.6 percent quar terly decline in
seasonally adjusted terms. Net exports made a positive, tho ugh modest,
contribution to growth, whereas private consumption and investment
expenditures slowed down significantly.
11. Tightening global liquidity conditions and modera ting domestic and foreign
demand have put restrain on the industrial production. Seasonally adjusted
data suggest that industrial production remained flat i n July compared with the
previous quarter, and the sharp downturn in industry cap acity utilization rate in
August points an ongoing slowdown in industrial production.
12. The uncertainty surrounding the global economy increased the downside risks
to foreign demand. Capacity utilization rates in indu stries such as textiles,
clothing, vehicles and machinery-equipment, which account f or a substantial
share in exports, declined in August, indicating a lower contribution from
external demand to economic growth. On the other hand, the robust demand
from oil exporting countries continues to support external demand.
13. The fall in agricultural production in the second quarter is believed to be short-
lived since it has been partly driven by regional drought problems. In fact, crop
production forecasts for 2008, recently released by the T URKSTAT, point to a
rising agricultural production in the second half of the year.
14. Leading indicators for the third quarter point to sluggish recovery in private
consumption expenditure. Although consumer confidence indi ces have
rebounded to some extent, they are still at low levels co mpared with the
episodes of vigorous domestic demand. Monetary indicators, consumer loans,
consumption indices and the Business Tendency Survey data sug gest a
similar outlook.
15. Recent readings indicate that investment expenditure have followed a flat
course in the third quarter. Indicators such as machinery-e quipment
production, imports of capital goods and sales of heavy com mercial vehicles,
point to a continued softening in machinery-equipment investments. July data
on production in the non-metallic minerals industry, a leading indicator for
construction investments, are slightly up from June in season ally adjusted
terms, but down from the first-quarter average. In add ition, building permits fell
by 20.1 percent year-on-year in the second quarter. Th e steady decline in
building permits since mid-2007 indicates that construction activities are
unlikely to rebound in the upcoming period.
16. Public expenditures registered a fall in the first h alf of 2008 in annual terms.
Public spending is expected to accelerate in the second half of the year, in line
with budgetary targets. This will partly offset the slo wdown in private
expenditures, and hence, support the aggregate demand.
17. Overall, ongoing problems in international credit markets and the global
economy continue to restrain both the domestic and extern al demand.
Therefore aggregate demand conditions will continue to support disinflation.
Accordingly, inflation is expected to fall gradually in the forthcoming period.
Monetary Policy and Risks
18. The Committee assessed that the current policy rate su pports disinflation.
Moreover, the decline in the global risk appetite has be en keeping longer-term
interest rates at high levels and leading to tighter monetary conditions.
alternative scenarios for food and energy prices since the second quarter of
the year. This framework should improve the predictabili ty of monetary policy
by providing conditional forecasts for different realiza tions of shocks. As a
mater of fact, developments since the publication of July Inflation Report have
confirmed the relevance of this strategy. Oil prices have f ollowed a
significantly lower course than the level assumed in the b aseline scenario.
Similarly, recent developments in agricultural commodity prices and in
domestic agricultural production indicate a more favorabl e outlook for food
prices than envisaged in the Inflation Report. According ly, the Committee
assessed that the course of oil and food prices has been close r to the
optimistic scenario outlined in the July Inflation Repor t, and therefore, a
measured rate cut would be considered should the favorabl e outlook in
inflation and commodity prices continue.
20. Recently, problems in the global financial markets h ave intensified. Regarding
the inflation outlook, these developments create upside r isks through potential
portfolio movements and downside risks through aggregate demand. The CBT
will not display a sharp reaction to temporary fluctuat ions in the financial
markets, unless there is a long lasting deterioration in expectations and a
significant worsening in the general pricing behavior. Y et, current
circumstances require monetary policy to be flexible on bo th sides. Depending
on the impact of the ongoing financial turmoil on the domestic economy, the
Committee will consider measured rate cuts as well as temp orary tightening
through active liquidity management.
21. Despite the recent decline in commodity prices, lagge d effects of the long
lasting supply shocks continue to exert pressure on headline inflation
especially through domestic energy prices, keeping alive th e risks of
generalized backward looking schemes in the wage and price setting
behavior. Although the widening output gap should cont ain the second round
effects of the supply shocks, the exact pace of disinflation w ould still depend
on the extent new inflation targets serve as a reference for economic agents.
Having this in mind, the CBT will continue to focus on e nhancing the credibility
of the new inflation targets.
22. A critical underlying assumption for the inflation and monetary policy outlook
outlined above is that government expenditures and incomes policy will evolve
in line with the official projections, and that there will be no further increases in
indirect taxes or administered price adjustments, except tho se required by the
automatic pricing mechanisms. Any deviation from this fram ework may lead to
a revision of the outlook for inflation and monetary policy.
23. In sum, despite the improvement in inflation outlo ok, the Committee assessed
that recently heightened uncertainties in the global f inancial markets require
monetary policy to remain cautious and decided to keep p olicy rates constant.
Future decisions on policy rates will depend on domestic a nd external
demand, developments in global markets, fiscal policy impl ementation, and
other factors affecting the medium term inflation outlook.
24. Meeting agenda also included an assessment of liquidi ty developments in
money markets. In order to alleviate the tightening in liquidity conditions since
May, the CBT has been injecting Turkish lira liquidity into the markets via repo
operations. Recent developments suggest that tight liquid ity conditions may
last through 2009 and onwards. The Committee members, referring to the
main policy document “Monetary and Exchange Rate Policy in 2008” dated
December 18th 2007, noted that the current outlook for liquidity conditions
may call for a technical adjustment in short term intere st rates. Accordingly,
the Committee decided to initiate the preparations fo r the redesign of the
operational framework of liquidity management in 2009, details of which will be
announced in December.
25. Prudent monetary policy is a necessary but not a suff icient condition for
attaining price stability. The support from fiscal policy and structural reforms
are also critical in this respect. Sound fiscal policy has be en one of the main
factors in driving inflation down to single digits. The role of fiscal policy will
continue to be critical in the road to price stability. Preserving the resilience of
the economy, especially under current conditions, require s the continuation of
fiscal discipline and structural reforms. In this respect, th e European Union
accession process and the implementation of structural refor ms envisaged in
the economic program remain to be of utmost importance. In particular,
advances in structural reforms, which would improve the qua lity of fiscal
discipline and enhance the productivity, are monitored cl osely by the CBT with
regard to their implications on macroeconomic and price stability.