SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-12-17

No: 2009 – 37
29 December 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: December 17, 2009
Inflation Developments
1. Consumer prices increased by 1.27 percent in Nov ember, driving annual
inflation up by 0.45 percentage points to 5.53 perc ent year-on-year, largely
due to rising unprocessed food prices. When unproce ssed food, energy and
gold are excluded, November outturn represents one of the lowest monthly
inflation rates recorded in recent years. In additi on, the behavior of
subcategories does not point to a deterioration in the general pricing behavior.
Overall, the November rise in annual inflation is m ainly attributable to
transitory factors and base effects, and thus under lying trend inflation remains
2. Food prices have been the major factor underlyin g the recent increase in
inflation. In particular, unprocessed food prices h ave remained volatile over
the year. After having registered the lowest third quarter rate of change in five
years, unprocessed food prices ran above seasonal a verages during the last
two months owing to higher fruit/vegetable and meat prices, which is expected
to continue into December. In contrast, the outlook regarding processed food
prices remains favorable.
3. Having picked up due to hikes in electricity tar iffs during October, energy
prices continued to rise in November in line with i nternational oil prices. The
annual rate of increase in energy prices is expecte d to accelerate in coming
months owing to base effects. The drop in commodity prices during the final
quarter of 2008 had driven energy prices down sharp ly starting from
December 2008. Therefore, the resulting impact of t hese base effects on
inflation is expected to be visible starting from December 2009.
4. Owing to the expiration of the temporary tax cut s, the annual rate of increase
in the prices of goods excluding energy and food co ntinued to increase in
November. Underpinning this development was the 7.6 1 percent rise in gold
prices owing to soaring international prices as wel l as the increase in clothing
and footwear inflation that was driven by the low base effects from a year ago.
5. Annual services inflation continued along a down trend during November.
Annual rental inflation declined further, while pri ces for transport and other
services dropped modestly. Higher meat prices had a more moderate impact
on restaurants and hotels than in the previous two months. Thus, annual
inflation in the overall services index decreased to historically low levels.
6. In sum, the Monetary Policy Committee (the Commi ttee) stated that the
upcoming period would be marked by strong base effe cts, particularly leading
to a sizeable increase in annual inflation in Decem ber. Yet, the Committee
expects core inflation to remain at low levels.
Factors Affecting Inflation
7. Third quarter national accounts releases were co nsistent with the outlook
presented in the October Inflation Report. Gross Do mestic Product (GDP)
continued to grow quarter-on-quarter, albeit slowly . In particular, the data
confirmed that after a robust second quarter, priva te consumption moderated
as tax cuts were phased out. Meanwhile, private inv estments have recovered
slightly quarter-on-quarter for the first time in a long while. Taken together,
total final domestic demand has remained flat.
8. Recent readings suggest that the economy is on t rack for moderate recovery.
Industrial production increased by 6.5 percent year -on-year during October
2009, which was the first year-on-year positive gro wth rate for a long period of
time. However, the Committee attributed the product ion growth largely to
working-day effects and noted that industrial produ ction continued to contract
year-on-year after adjusting for calendar-related e ffects. The Committee
expects calendar effects to remain prevalent during November and December,
and emphasizes that year-on-year comparisons should be based on calendar-
adjusted data.
9. The Committee indicated that industrial producti on grew markedly month-on-
month during October, even in seasonally adjusted t erms. Yet, production is
likely to fluctuate beyond seasonal patterns during the month of Ramadan and
the ensuing religious holiday period, and therefore assessments regarding
production should not rely on a single month’s real ization. Accordingly,
comparing the September-October period with the Jul y-August period suggest
that industrial production is on a moderate recover y path in seasonally
adjusted terms. Thus, it should be noted that it wo uld be inappropriate to
conclude a strong and durable recovery in productio n, based solely on the
October data.
10. Leading indicators suggest that the pace of gro wth continued to slow in the
fourth quarter. With the expiration of all tax ince ntives, the underlying trend for
consumption demand has moderated. The unfavorable o utlook continues for
spending categories more sensitive to current incom e. The Committee
members noted that, given the precarious labor mark et conditions, the
demand for categories sensitive to current income m ight continue to be weak.
In seasonally adjusted terms, the production of con sumer goods remained
virtually unchanged in October from a quarter ago, while imports, especially of
passenger cars, contracted. Consumer confidence and consumption indices
confirm this weak outlook. Therefore, consumption d emand is expected to
remain mostly flat during the final quarter.
11. Among the factors restraining capacity utilizat ion across manufacturing
industries, the share of insufficient domestic dema nd continued to increase,
while the role attributed to weak foreign markets r emains high. In addition,
aggregate demand uncertainty continues to suppress investment demand.
Considering both production and import data, invest ment demand is expected
to recover further during the fourth quarter, yet r emain at low levels. The
Committee restated that the idle capacity resulting from low resource
utilization is likely to have a dampening effect on investment demand for quite
some time.
12. Foreign demand remains weak. In this context, t he absence of a strong and
sustained turnaround in industrial production conti nues to restrain services
sectors with strong industrial linkages, such as tr ade and
transport/communication as well as the outlook for economic activity and
employment prospects more generally. In fact, close r inspection of the
industrial composition reveals that trade-related services sectors seem to have
been particularly more affected by foreign demand c onditions. Therefore,
without a marked improvement in foreign demand and/ or significant
diversification in export markets, economic recover y is not likely. Hence, the
Committee reiterated its expectation that aggregate demand would recover
gradually.
13. Uncertainties regarding aggregate demand linger, an d employment conditions
are expected to take a long time to fully recover. In fact, unemployment rose
by 2.7 percentage points to 13.4 percent year-on-ye ar during September
2009, while non-farm unemployment increased by 3.5 percentage points year-
on-year. The labor force participation rate continu es to have an adverse
impact on the unemployment rate. After hitting a re cord high in May 2009,
non-farm and overall unemployment rates have recent ly recovered in
seasonally adjusted terms, albeit modestly. The end of the decline in industrial
employment was viewed by the Committee as an import ant development.
However, given the slow pace of recovery in employm ent, the unemployment
rate is likely to remain elevated for a long time.
Monetary Policy and Risks
14. The collapse of global demand and commodity pri ces after the intensification
of the global crisis during the last quarter of 200 8 had been followed by a
sharp fall in inflation. Accordingly, annual inflat ion ―the year-on-year rate of
change in the consumer price index ―is likely to display upward movements
owing to base effects, although monthly rate of changes in prices are expected
to hover at moderate levels. The Committee therefor e stated that strong base
effects could lead to a significant increase in annual inflation in the forthcoming
period, especially in December; yet core inflation would remain at low levels.
Annual inflation could display upward movements thr ough mid-2010 by the
same token, yet this possibility had already been r eflected in the monetary
stance outlined in the October Inflation Report.
15. The Committee indicated that the economic activ ity is on a moderate but
stable upward trend. However, resource utilization, hence inflation, is expected
to stay around low levels in the medium term, given the existing low levels of
capital and labor utilization. Therefore, core infl ation indicators would display a
modest pace, and hence annual inflation is expected to revert back to a
declining trend in the last quarter of 2010, ending the year below the target.
16. 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. Committee members have also unde rscored the important
role of the sound domestic banking system in suppor ting the recovery in credit
markets. However, the ongoing tightness in lending standards regarding credit
to small- and medium-sized enterprises as well as l onger-term loans is still a
factor restraining economic activity.
17. Although recent data releases indicate that the worst is likely to be over,
concerns regarding the strength of the global recov ery remain. Accordingly,
taking into account that lingering problems across the global economy have
yet to be resolved completely and there are still u ncertainties regarding the
strength of the recovery, the Committee, in line wi th the policy stance
presented in the Inflation Report, emphasized that it would be necessary to
keep policy rates at low levels for a long period of time.
18. In particular, ongoing problems in credit and l abor markets pose downside
risks for global activity. Should global conditions deteriorate again, and
consequently delay the domestic recovery, another cycle of rate cuts would be
considered. Committee members stated that although materialization of this
scenario has become less likely, it should not be completely disregarded.
19. 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.
Given the current slack across the economy, a fall 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
20. 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.
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 medium term.
22. 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.