SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-03-19

No: 2008-07
31 March 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: March 19, 2008
Inflation Developments
1. Consumer prices rose by 1.29 percent in February, bri nging annual inflation to
9.10 percent. The rise in annual inflation was mainly driven by the sharp
increase in unprocessed food prices, as highlighted in our previous Summary
of the Monetary Policy Committee Meeting. The annual CPI inflation excluding
unprocessed food remained unchanged from the preceding m onth.
2. In February, food prices were up by 5.05 percent, r ecording the highest
monthly increase since the introduction of the 2003-base- year index. Fresh
vegetable prices displayed an unusual rise due to adverse weather conditions.
On the other hand, the high rate of increase in Febru ary also brings about the
possibility of a correction in vegetable prices in March. Processed food
inflation also remained on an upward trend. Bread an d cereal prices have
continued to increase in response to elevated domestic and global wheat
prices. Moreover, higher import prices for food manufact uring industries put
upward pressure on processed food prices through both inte rmediate goods
and imported final consumer goods. Therefore, prices of processed food other
than bread and cereal have also shown high rates of incr ease. Accordingly,
the course of processed food prices remains as a risk, as it wa s highlighted in
the January Inflation Report.
3. Energy prices increased by 0.30 percent in February, rai sing this group’s
annual inflation rate to 16.35 percent. Prices of domestic fuel products went up
by 0.83 percent along with rising world oil prices, whi le prices of energy-
related housing utilities remained almost unchanged. Th e current elevation of
oil prices not only poses a threat to domestic fuel prices, but also puts upward
pressure on prices of energy-related housing utilities. The energy prices in CPI
are expected to rise further in March.
4. The year-on-year increase in prices of goods excluding energy and
unprocessed food has been flat for the third consecutive m onth. In terms of
the sub-groups, clothing and footwear inflation continu ed to decelerate in
annual terms. The annual inflation in consumer durable s was slightly down in
January. Gold prices, on the other hand, continued to a dd pressure on
headline inflation.
5. Services inflation continues to decelerate. The annua l rate of increase in rents
moderated further in February to 15 percent. The stea dy decline in rent
inflation for the past ten months is considered to be a favorable development
by the Monetary Policy Committee (the Committee). Ye t, price hikes in
catering and transport services due to soaring food and e nergy prices curbed
the downtrend in services inflation.
6. Against this background, the Committee assesses that risin g global
uncertainty and the adverse developments in food and energy prices may lead
to some delay in reaching the inflation target. Moreover, it should be noted that
last year’s base effect may lead to an upward trend in annual core inflation
indicators, starting from the second quarter of the year.
Factors Affecting Inflation
7. The Gross Domestic Product (GDP) growth rate for Janua ry-September 2007
is revised upwards to 5 percent from 3.8 percent, due to the new methodology
employed by the TURKSTAT. The revision did not bring a major change for
the main trends in the GDP growth. The average quart erly GDP growth rate,
which was 2.2 percent between 2003Q3-2006Q2, has become 0.8 percent in
the 2006Q3-2007Q3 period following the strong monetary tightening.
8. Current indicators suggest that the output continues t o grow at a moderate
pace. Industrial production in January increased by 11.7 percent annually,
consistent with the assessment of the Committee in the Feb ruary meeting.
When corrected for the the number of working days, annu al rate of growth in
the industrial production drops to 5.2 percent, pointin g to a considerable base
effect. Seasonally adjusted industrial production in Janu ary is higher than the
December figures, yet still below the levels recorded in October and
November. February export figures and other leading indicators suggest that
industrial production continues to grow, albeit at a moderating pace.
9. Domestic automobiles sales, one of the key indicators fo r consumer demand,
has shown high growth rates in annual terms during the first two months of the
year, but remained well below the levels recorded in the last quarter of 2007 in
seasonally adjusted terms. Domestic sales of white goods in January 2008 fell
by 18.9 percent in annual terms. After adjusting for se asonality, white goods
sales fell significantly from the previous month, and ha ve been lower than the
2007-fourth quarter levels. Similarly, the monthly a verage of the seasonally
adjusted CNBC-e Consumption Index for January-February period was also
below the level observed in the previous quarter. Mor eover, according to
CBT’s Consumer Tendency Survey, spending on automobiles, houses,
durables and semi-durables remained low. Consumer confidence indices have
been declining since September. Consumer credits have cont inued to
moderate during the first quarter of 2008, due to un certainties in global credit
10. On the other hand, imports of consumer goods continu ed to accelerate in
January both in annual and monthly terms. However, th e tightening in credit
conditions and the recent developments in exchange rates are likely to curb
import growth.
11. Investment spending has continued to slow down. The growth rate of private
machinery-equipment investments was revised downward for the first nine
months of 2007. The revision revealed that machinery-e quipment growth rate
in investments was declining during this period. Recent m achinery-equipment
production figures indicate that investments remain on a downward track.
Seasonally adjusted machinery-equipment production, whi ch had decreased
on a quarterly basis starting from the second quarter of 2007, declined both in
annual and quarterly terms in January. Electrical machin ery production also
went down in January in seasonally adjusted terms. Impor ts of capital goods,
on the other hand, continued to rise sharply in January both on a yearly and
monthly basis. Despite the rebound in January-February period, sales of
heavy commercial vehicles are still below the levels recor ded during the times
of vigorous domestic demand.
12. Non-metallic mineral production, which is among key indicators of
construction activity, remained unchanged in 2007 in annual terms. Seasonally
adjusted figure for January 2008 was below the average level of the previous
quarter. The turmoil in global financial markets and i ts likely impact on the
domestic economy signal that the slowdown in the constructi on industry may
continue. CBT’s Consumer Tendency Survey data on “consumers’ likeliness to
buy or build a house during the next twelve months” support this outlook.
13. Deterioration in the overall investment sentiment is also evident in the results
of Istanbul Chamber of Industry’s (ICI) Economic Outlook Survey for the
second half of 2007. Accordingly, corporate profitabilit y fell substantially in
annual terms. While the number of firms making new inv estments fell partly
due to decreases in profitability, we observe an increase in firms’ tendency to
invest abroad.
14. External demand maintained its steady growth duri ng the first quarter.
According to data from Turkish Exporters’ Assembly, annual export growth
measured in US dollars amounted to 40.7 percent in Feb ruary, and leading
indicators for March also suggest a strong export growth i n nominal terms.
Since exports are growing largely due to movements in the terms of trade, the
quantity indexes could provide a better indicator for the underlying trends in
exports. In that sense, the robust growth in seasonally a djusted quantity
indexes during January reveal that exports remain strong.
15. The slowdown in the economic activity is also evident in the non-farm
employment data for the fourth quarter of 2007. The fourth-quarter non-farm
employment remained unchanged from a year earlier, w hereas non-farm
unemployment rate rose by 0.4 percentage points annual ly and reached 12.6
percent. Seasonally adjusted non-farm unemployment, on the other hand,
declined for the first time since the second quarter of 2003.
16. In conclusion, although the readings related to the first couple of months of
2008 indicate an ongoing but moderating growth, deep ening problems in
international credit markets have increased the downside risks.
Monetary Policy and Risks
17. Increased volatility in financial markets and tighte ned credit conditions are
likely to restrain the domestic demand in the forthcomin g period. Accordingly,
the Committee assessed that aggregate demand conditions w ill continue to
support disinflation.
18. Recent rise in the market interest rates can mostly be attributed to the
reflections of global risks on the domestic environment. M ovements in
exchange rates resulting from the financial market volat ility may have adverse
effects on inflation in the short term. On the other h and, given the weak
demand conditions, exchange rate pass-through should be r elatively limited at
this point.
19. Notwithstanding the moderation in domestic demand, some risks remain for
the inflation outlook:
20. Recent research conducted by the staff of the Central Bank of Turkey (CBT)
suggests that economic agents lately have been attaching more weight to past
inflation in forming their expectations. This observati on implies that
accumulated impact of the hikes in food and energy prices not only puts delay
on the disinflation process but also impedes the improvem ent in inflation
expectations. Besides, the movements in exchange rates and the heightened
risk aversion may have further adverse impact on inflati on expectations.
Deterioration in inflation expectations has increased th e uncertainty regarding
the second round effects of the supply side shocks, thereby h ighlighting the
risks of higher-than-envisaged inertia in inflation dyn amics. Yet, medium term
inflation expectations still point to a declining infla tion trend, indicating that
inflation targets, to some extent, continue to serve as a medium term anchor.
The Committee will continue to monitor the main tren ds in inflation
expectations closely.
21. Uncertainties in the global economy pose risks to the inflation outlook through
possible portfolio effects and thus movements in exchange rates. The
difficulties in the money and capital markets of the dev eloped economies
continue, despite the relevant measures taken by the cent ral banks. This
process also affects the domestic markets. The CBT monitors t he
developments in financial markets with caution.
22. Maintaining the prudent fiscal policy is of utmost i mportance under current
circumstances. Our medium term projections are based on the assumption
that government expenditure targets will be met in 2 008. Moreover, we
assume that any extra need to readjust the primary bud get balance will be
implemented through expenditure cuts rather than hikes in indirect taxes. Any
deviation from this assumption may alter the inflation and monetary policy
23. The Committee assessed that rising global uncertainty and the adverse
developments in food and energy prices might lead to so me delay in reaching
the inflation target. Monetary policy remains focused on attaining the 4 percent
inflation target in the medium term. However, reacti ng aggressively to supply-
side shocks would lead to undesired fluctuations in the out put. Therefore,
current conditions necessitate the need to remain flexibl e. In that sense, the
period inflation reaches the target may vary depending on the developments in
commodity and financial markets.
24. In sum, ongoing uncertainties in the global economy and the risks to the price
setting behavior have increased the need for the monet ary policy to be more
cautious. The Committee will continue to closely monitor the second round
effects of the elevated food and energy prices. Monetar y policy remains
restrictive even after the recent rate cuts. Future rate cuts will depend on
developments regarding global market conditions, extern al demand, fiscal
policy implementation, and other factors affecting the medium term inflation
25. The support from fiscal policy and structural reforms are critical in preserving
the resilience of the economy under current conditions. I n this respect, the
European Union accession process and the implementation of structural
reforms envisaged in the economic program remain crucial. In particular,
advances in structural reforms, which would improve the q uality of fiscal
discipline and enhance the productivity, are monitored closely by the CBT with
regard to their implications on macroeconomic and price stability.