SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Central bank: tcmb | Type: decision | Date: 2006-05-04

No: 2006-21
May 04, 2006
SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Meeting Date: 27 April 2006
Inflation Developments
As foreseen in the Inflation Report published in early 2006, the downward
trend in inflation came to a halt in the first quarter of the year. Compared to that of the
previous year, cumulative inflation was realized at a higher r ate for the first quarter of
2006. However, this development mainly stemmed from the recent high -rated
increases recorded in the prices of alcoholic beverages-tobacco, e nergy and
unprocessed food prices. The growth rate of the index derived by excluding t hese
products shows that the inflation tendency is downwards and the increase in the said
index in the first quarter of the year is lower, compared to the s ame period of the
previous year. This observation points to the fact that the basic tendency of inflation is
still downwards. On the other hand, it is striking that the cut in V alue Added Tax
(VAT) in March on the textiles, ready-to-wear and leather sect ors has not been passed
on to the final prices as it should have been. Moreover, the uncertai nties surrounding
oil prices, as well as the possibility that the high-rated incr eases in food prices may
persist are considered to be risk factors in terms of short-term forecasts.
High price increases in the services sector, – and especially that of rents –
continue to be among the factors cutting down the pace of the disinflati on process.
Generally speaking, the price increase in the services sector is foreseen to have a
share of 2.5-3 points in 2006 inflation. In that case, goods group inflation w ill have to
be realized below 3 percent, for the 2006 target not to be exceeded. How ever, taking
into account the recent high increases in food prices and the costs of raw materials,
this doesn’t seem to be very likely.
In the light of all these assessments, it can be said that the likelihood of the
2006 target being exceeded is higher than the likelihood that it will re main below the
target. Still, what is important here is that our forecast f or the disinflation process to
prevail in the medium-term remains. As also stated in the Infl ation Report published
in April, under the assumptions that oil prices remain the same and no exogenous
shock occurs in the upcoming period, inflation is foreseen to display a dow nward
tendency in the medium-term.
According to the Expectations Survey data, inflation expectations for the next
twelve months retain their horizontal course. With a 4.67 percent, annual inflation
expectation by the end of the next 24 months– a question asked for the first t ime – is
at a level close to the targets for 2007 and 2008. In other words, econom ic units
anticipate the disinflation process to continue in the medium-term.
Although the annual growth of the manufacturing industry price index has
displayed an acceleration trend recently – also due to the increase s in oil and basic
metal prices –, it is still at relatively low levels.
Factors Affecting Inflation
Seasonally adjusted GDP figures pertaining to the last quarter of 2005 point to
the stable course of growth. The sales and production data pertaining t o the first
quarter of 2006 support this outlook, as well. Real consumer loan utilizat ion rates
maintain their high rate of increase. In the same period, seasona lly adjusted domestic
sales of white goods increased compared to the previous quarter. Alt hough seasonally
adjusted domestic sales of automobiles declined compared to the last quarter of 2005,
the data pertaining to February and March indicate that the deterior ation observed in
January was temporary and the demand for automobiles maintains its br iskness.
Moreover, the strong upward trend of the imports of consumer goods also c ontinued
in the first quarter of 2006.
In light of the current indicators, it is observed that the rate of increase of
private consumption was relatively stable in the previous period but it still maintained
its strong trend. Meanwhile, private consumption expenditures, which cons titute the
other component of domestic demand, maintain a favorable course. Some of the
indicators that support the strong growth trend in investment expenditures include: In
the first quarter of the year, seasonally adjusted imports of ca pital goods increased
rapidly compared to the previous quarter. Similarly, the growth of domestic sales of
heavy commercial vehicles continued at a rapid pace in the same period. Production
and imports data pertaining to the sub-sectors of the manufacturing indus try;
machinery-equipment, electrical machinery and office machinery s ectors; give
positive signals for the continuation of investment growth. According to the Business
Tendency Survey, despite the decline observed in investment expenditure s in the
January-March period, they are still at high levels. Meanwhile , there has not been a
significant change in the share of those saying “do not plan any inves tment
expenditures”. In the January- February period, the utilization of long-t erm credits
from abroad displayed a higher rate of increase compared to the sam e period of the
previous year. This development points to the continuation of the strong tr end of the
private sector’s investment demand. The upward trend observed in the main sector
providing intermediate input for the construction sector; other non-metal and mineral
production; continued in the first two months of the year. The share of hous ing credits
in total consumer loans continues to grow. When the data pertaining to c onstruction
permits are analyzed as of the last quarter of 2005, it can be obse rved that the upward
trend of housing construction continues. In addition to housing construction, the
increasing number of construction permits pertaining to industrial buildi ngs is a
favorable development for the productive capacity-oriented investment s.
To sum up, the evaluations regarding supply and demand conditions point to
the fact that the stagnation observed at the start of the year was temporary and that the
increase in total demand maintains its stable course. Although employment, excluding
the agricultural sector, has rapidly increased in a stable manne r since the second
quarter of 2004, the continuance of productivity increases in line with t he growth of
investments and structural
reform process restricts cost pressures. However, it is
expected that the support of supply and demand conditions in the disinflation proc ess
will be limited in the upcoming period compared to previous years.
Risks and Monetary Policy
The ongoing rapid increases in oil prices and other raw material pr ices in the
recent period continue to pose risks in terms of inflation dynamics. T he effects of oil
prices on inflation have constituted one of the main factors that sla ckened the
downward course of inflation expectations in the first quarter of 2006. If the said
trend continues in the upcoming period, the unfavorable effect of oil pric es on 2006
end-year inflation will become discernible. The effect of increa ses in oil prices has
been confined to relative price changes so far, and has not led to any changes of
pricing in the sectors that do not utilize petroleum products as direct input. This fact is
reinforced by the continuance of the downward trend in the annual rate of i ncrease in
the index excluding exogenous factors such as the prices of alcoholic bever ages –
tobacco products, energy and unprocessed food. In other words, current availa ble data
show that the second order effects are limited. Nevertheless, expectations should be
monitored more carefully than the previous quarter. At this point, it should be
underlined once more that the Central Bank will give the proper respons e if the
increases in oil and other raw material prices continue and the se cond order effects
become evident.
The difficulty of predicting the course of the global risk appetite and
international liquidity conditions stand as another risk factor in term s of the upcoming
period. In the recent period, the improvement in the quality of the fi nancing of the
current account deficit and favorable developments in public finance ar e believed to
increase the resistance of the economy to likely shocks. However, despite t hese
structural improvements, it is known that any likely shock arising from the global risk
appetite and international liquidity conditions has the potential to unfavor ably affect
our economy to a certain extent. In order to prevent the said effect s from threatening
price stability, fiscal discipline as well as prudent monetary policy must be
maintained. Besides, avoiding any implementation that would spoil the expectations
about economic fundamentals is critical for sustaining the resilie nce of the economy
to exogenous shocks.
In the light of the developments summarized above, the Monetary Polic y
Committee has concluded that recent developments do not significantly c hange the
medium-term outlook outlined in the Inflation Report of January. In the re cent period,
growth followed a stable course, investments and productivity increas es continued
and the second order effects of petroleum and other commodity prices re mained
limited. The main trend of CPI inflation excluding groups such as ener gy,
unprocessed food and alcoholic beverages-tobacco products, points to a downward
movement. Annual inflation is anticipated to decrease starting from the second quarter
of the year. However, the cautious approach of monetary policy should be maintained
in view of the continuation of price rigidities in the service sector, the reduction of the
contribution of demand conditions to disinflation, and the continued high volatili ty in
oil prices. Meanwhile, developments in international liquidity conditi ons are being
closely monitored
In consideration of information currently available, policy rates a re less likely
to increase, rather than remain stable or decrease in the medium -term. In the near-
term, however, new information will be carefully monitored. This policy perspective
will ensure that inflation is in line with the target path around m id-2007. On the other
hand, it should be emphasized that any new data and information associate d with the
inflation outlook will compel the Monetary Policy Committee to potenti ally revise its
stance regarding the future.