SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-04-17

No: 2008-11
30 April 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: April 17, 2008
Inflation Developments
1. Consumer prices rose by 0.96 percent in March, pushing annual inflation up to 9.15
percent. Inflation went up primarily due to soaring p rocessed food prices and
exchange rate movements, breaching the upper bound of the uncertainty band in
2. The processed food prices continued to rise sharply duri ng the first quarter of 2008.
In March, processed food prices rose by a dramatic 2.86 per cent, lifting annual
inflation in processed food to 16.63 percent. Annual ra te of increase in bread and
grain prices reached 20.14 percent. Overall, processed foo d prices have remained
elevated, further aggravating the pressures on food inflation.
3. Energy prices were up 0.98 percent in March. The stee p increase in crude oil prices
and the weakening of the Turkish lira drove fuel pri ces higher in March, portending a
further rise in April. Moreover, elevated oil prices h ave added to the pressures on the
prices of energy utilities in housing.
4. Inflation in goods excluding energy and unprocessed f ood edged up slightly in March
after having flattened out during the past three mon ths, as clothing and footwear
prices increased by 1.80 percent, which is above the seasona l average. The recent
depreciation of the Turkish lira had a limited effect on prices of durables in March.
Yet, the lagged effects of exchange rate movements are likely to put pressure on
consumer durables in April.
5. Although rental inflation has decelerated further, the continued rise in energy and
food prices has driven prices for transport and catering se rvices higher, causing the
annual services inflation to edge up by around 0.5 basi s points to 8.93 percent in
March. Annual inflation in other sub-categories of services also displayed a rise.
6. The Monetary Policy Committee (the Committee) not ed that inflation may temporarily
rise in the second and third quarters due to rising oil prices, lagged exchange rate
pass-through and unfavorable base effects, before startin g to fall again in the final
Factors Affecting Inflation
7. Gross Domestic Product (GDP) grew by 3.4 percent in th e fourth quarter of 2007 in
annual terms, resulting in a GDP growth of 4.5 percent for the whole year.
8. Private consumption and investment made the greatest contribution to the fourth-
quarter GDP growth. Government spending, on the othe r hand, provided a limited
contribution. Besides, the contribution of net external demand was negative at 3.7
percentage points. The Committee noted that the deman d for domestic goods and
services remained low during this period, as local residen ts had increased their
demand for imported goods for their relative price ad vantage. In fact, the fourth-
quarter GDP growth falls to 0.2 percent if stock changes are excluded.
9. In seasonally adjusted terms, GDP displayed a 2.1 per cent quarterly growth in the
last quarter of 2001. Yet, the Committee stated, in co nsideration of global
uncertainties surrounding the current economic climate, that this growth provides only
a partial insight into the upcoming period. Indeed, i ndustrial production during
January-February remained unchanged from the previous quarter on a seasonally
adjusted basis, indicating that economic activity has continued to moderate.
10. Indicators for consumer demand confirm the slowdown i n domestic demand. In
seasonally adjusted terms, the first-quarter CNBC-e consum ption index remained
unchanged on a quarterly basis, whereas the import quan tity index for consumer
goods was slightly down from the preceding quarter. In the meantime, domestic sales
of automobiles were markedly up in annual terms on th e back of a low base effect,
but were significantly lower than the figures recorded a quarter earlier. Domestic
sales of white goods have declined both on a quarterly and annual basis during
January-February. The Committee noted that seasonally adjusted sales of white
goods have fallen below the range between 400,000 to 450,000 units, their lowest
level since the first quarter of 2004.
11. Moreover, the CNBC-e and CBT consumer confidence in dices have been on the fall
since September, when global risks became more apparent. In fact, after a rebound
during the first half of 2007, the growth of consumer loans has slowed down for the
second consecutive quarter. The Committee assessed that the global credit crunch
has recently continued to hold down consumer loans.
12. The fourth-quarter rebound in private sector’s mach inery-equipment investment is
expected to be short-lived. Indicators for the first qua rter of 2008 suggest that the
investment demand for imported goods is still robust, while the production of domestic
capital goods has slowed from the previous quarter. Impo rts of capital goods, which
saw a dramatic annual growth of 34.3 percent during Jan uary-February, point to a
quarterly acceleration as well. However, the slowdown i n machinery-equipment
production for the past one year continued into the fi rst two months of 2008, resulting
in an annual decrease of 6.2 percent. Besides, electrical machinery production and
domestic sales of light commercial vehicles increased annuall y at a fairly strong rate,
but declined quarterly in seasonally adjusted terms. Sal es of heavy commercial
vehicles have remained low since the monetary tightenin g and narrowed slightly on a
quarterly basis in response to the slump in March. In sum, available production,
import and sales data suggest that machinery-equipment i nvestments will slow down
in the first quarter of 2008, but will remain above their year-ago level thanks to the
base effect.
13. Construction investments have flattened out for the past one and a half years.
Residential construction permits declined in 2007 in annu al terms. Along with the
downdraft in construction activity, production gains in h ousing-related industries have
stalled. The production of nonmetallic minerals, an int ermediate input to construction
activity, remained unchanged in 2007 from the previou s year, while furniture
manufacturing decreased by 13.8 percent. The housing secto r will continue to be
restrained by rising precautionary savings and tighter cr edit conditions due to global
uncertainties.
14. In sum, recent readings on the private demand for consumption and investment have
slowed down. The labor market also suggests a similar out look. In seasonally
adjusted terms, non-farm employment increased by a quar terly 0.1 percent on
average during 2007, after having risen at a steady q uarterly average of 1.1 percent
from 2001 to end-2006.
15. The contribution of net exports to GDP growth tur ned negative in the second half of
2007 mainly due to rising imported goods driven by lo wer relative prices. Recent data
indicate that the sizable annual growth in exports and imports has continued into the
first quarter of 2008. Thanks to the sharp increase in e xport quantity during January-
February, growth in real exports was stronger than imp orts. Given both the recent
weakening of the Turkish lira and the slowdown in dom estic demand, the rate of
increase in import quantity will likely begin to decelerate in the second quarter and net
exports will make an increased contribution to growth. Yet, the possibility that
international prices of oil and other commodities might increase further continues to
pose a risk to the foreign trade deficit.
16. According to export data released by the Turkish Ex porters’ Assembly for March and
April and “expectations for export orders for the next three months” from CBT’s
Business Tendency Survey, exports will continue to grow sh arply in the second
quarter of 2008. Although the more pronounced downsid e risks to the growth of
advanced economies might put pressure on the export perf ormance, the increased
weight of exports to countries other than EU and the U S during the past few months
can partially offset that risk.
17. In sum, deepening problems in international credit markets continue to restrain the
domestic demand, while external demand remains strong. Overall, aggregate
demand conditions continue to support disinflation.
18. After growing modestly in the second and third qua rters of 2007, labor productivity in
the manufacturing industry posted a recovery thanks to t he relatively strong fourth-
quarter production. In this sense, unit labor costs fell o n an annual basis and
continued to support disinflation, though at a lesser ex tent. The Committee
emphasized the need to implement measures to improve t he investment climate and
to foster productivity, which would support price stability in the medium term.
Monetary Policy and Risks
19. Rising food and energy prices and ongoing uncertain ties in the global economy have
worsened inflation expectations and increased the upside risks on inflation.
Accordingly, monetary policy adopted a tightening bias.
20. The members also assessed the revisions in forecasts to be published in the Inflation
Report. The Committee pointed that food and energy prices may continue to rise due
to structural factors and this should be taken into account while revising the forecasts.
Consequently, assuming a continued rise in food and energy prices and incorporating
recent exchange rate movements have led to a significant upside revision in the
inflation forecasts.
21. The Committee assessed that bringing inflation back to 4 percent by the end of 2009
would require offsetting the first round effects of the likely supply shocks that are
expected to continue during 2008-09, and thus create un desired fluctuations in the
economic activity and relative prices. In fact, revised pr ojections suggest that,
converging to the medium term target of 4 percent may extend beyond two years,
even when tight monetary policy is maintained for an extended period.
22. Since inflation is seen above the medium term targ et for a considerable period, the
meeting agenda also covered the issue of target revision . Committee members
indicated that changing the target for end-2008 would not be appropriate, since doing
so would be a clear violation of the accountability pri nciple in practice. Regarding
targets for 2009 and afterwards, the Committee assessed t hat, given the uncertainty
surrounding the food and energy prices as well as the gl obal economy, it would be
wiser to reconsider the issue towards the end of this year in tandem with the budget
preparations. Accordingly, we envisage a framework in w hich forecasts serve as
intermediate anchors while the medium term is anchored by the 4 percent target. The
Committee therefore noted that extending the forecast horizon in the Inflation Report
to three years would enhance the efficiency of the overall strategy of monetary policy.
23. In light of these considerations, we expect inflatio n to reach 4 percent in three years.
Extending the horizon within which inflation converge s to the target does not mean
that monetary policy will be looser in the forthcoming period. On the contrary, the
Committee will be more responsive to bad news than goo d news and will consider a
measured tightening when needed.
24. The Committee indicated that the revised forecasts, which are based on quite
conservative assumptions--especially on food and energy prices, imply that downside
risks are as significant as upside risks. Considering the sign ificant role of supply
shocks under current conditions, it was noted that providi ng projections under
alternative scenarios for food and energy prices would b e beneficial for the
communication of monetary policy. The Committee also assessed that materialization
of upside risks would require further tightening of th e monetary policy stance, while
downward surprises in food and energy prices would be pe rceived as an opportunity
to bring inflation back to target in a shorter period.
25. A protracted period of rising food and energy pri ces have led to a significant
overshooting of the inflation targets since the adoption of the inflation targeting regime
and consequently increased the stickiness in inflation expe ctations, as economic
agents have become more backward looking. Under normal conditions, supply
shocks are expected to alter relative prices rather than the underlying inflation trend.
Nevertheless, the fact that several long-lasting shocks app eared concurrently has
increased the risks to the price setting behavior. This vi ew is also supported by a
recent study by the CBT staff, which suggests that recently economic agents have
been attaching more weight to past inflation in formi ng their expectations. Overall, it
may be necessary to pursue a tighter monetary policy shou ld the price setting
behavior continue to deteriorate.
26. Another major risk to the inflation outlook is a sharper than expected slowdown in the
global economic activity, which, in turn, could lead to further volatility in financial
markets. The eventual impact of the financial turmoil on the global economic activity
is yet to be seen. These uncertainties have been dampeni ng the risk appetite and
thus slowing the capital flows to emerging economies. The CBT will not react to
temporary fluctuations in financial markets. Yet, we wi ll not hesitate to tighten
monetary policy in case of a significant worsening in the overall pricing behavior.
27. The Committee underscored that current liquidity co nditions provide the CBT with a
flexible tool to engineer a rapid monetary tighteni ng when needed. The excess
liquidity in the money market has been shrinking duri ng the past few months, due to
factors such as reduced daily minimum amount in reserve pu rchase auctions,
relatively low rollover ratio of the FX debt by the Treasury, and rising money demand.
This trend is expected to prevail in the forthcoming pe riod, possibly leading to a
tightening in monetary conditions. The Committee therefore noted that this framework
provides the CBT with a flexible and efficient tool, which makes it possible to
implement a monetary tightening without conducting a formal MPC meeting.
28. Finally, the Committee underscored that the mediu m-term inflation projections
assume no further increases in indirect taxes or administer ed price adjustments,
except those required by the automatic pricing mechanism. In particular, this means
that any needed tightening in the fiscal balance would occur largely through
expenditure cuts rather than higher excise taxes. Any de viation from this framework
may have an effect on the outlook for inflation and monetary policy.
29. In sum, the Committee assessed that preventing the potential second-round effects of
the recent deterioration in inflation expectations mig ht require maintaining a tight
monetary policy for a considerable period. Future mone tary policy decisions will
depend on developments regarding global market condit ions, external demand, fiscal
policy implementation, and other factors affecting the medium term inflation outlook.
30. Prudent monetary policy is a necessary but not a suff icient condition for attaining
price stability. The support from fiscal policy and structu ral reforms are also critical in
this respect. Sound fiscal policy has been one of the main factors in driving inflation
down to single digits. The role of fiscal policy will con tinue to be critical in the road to
price stability. Preserving the resilience of the economy , especially under current
conditions, requires the continuation of fiscal discipline and structural reforms. In this
respect, the European Union accession process and the implem entation of structural
reforms envisaged in the economic program remain to be of utmost importance. In
particular, advances in structural reforms, which would im prove the quality of fiscal
discipline and enhance the productivity, are monitored closely by the CBT with regard
to their implications on macroeconomic and price stability.