SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-12-18

No: 2008 - 41
30 December 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: December 18, 2008
Inflation Developments
1. Consumer prices increased by 0.83 percent in November and annual inflation
declined to 10.76 percent. Processed food and energy inf lation eased on the
back of falling commodity prices, while exchange rate pass -through to
domestic prices remained limited. In addition, services in flation continued to
moderate owing to the weakening in domestic demand.
2. Processed food prices fell in November, whereas unproce ssed food prices
continued to rise on soaring vegetable prices. Annual in flation in processed
food prices registered a cumulative drop of 8.6 points i n four months, and is
expected to decelerate further in the upcoming period.
3. Owing mainly to the last year’s base effect created b y the excise tax hikes and
the sharp increase in water rates, annual energy price i nflation declined by 6.9
points to 24.09 percent in November. Given the reducti ons in fuel and LPG
prices in December, energy prices will continue to support disinflation.
4. Annual inflation in goods excluding energy and foo d declined by about 1.3
points to 3.83 percent, mainly on account of the modera tion in clothing price
inflation driven by weak demand conditions. In the dur ables group (excl. gold),
annual inflation rose by about 1 point due to the la gged impact of exchange
rate movements. The Monetary Policy Committee (the Co mmittee) noted that
the short-term exchange rate pass-through in durable go ods has been
significantly lower than the levels implied by the historical estimates.
5. The easing in supply shocks and the softening in domesti c demand continued
to have a favorable impact on services prices in November , bringing its annual
inflation down to 10.88 percent. Rent inflation conti nued to moderate. Annual
inflation in catering prices has further declined on slow ing food inflation and
weakening domestic demand. Moreover, the fall in fuel prices has started to
put downward pressure on transport prices. Accordingly, sea sonally adjusted
core inflation indicators also remained on a downward track.
Factors Affecting Inflation
6. Third quarter GDP developments were largely consiste nt with the outlook
provided in the October Inflation Report. Public spending and net exports were
the main drivers of GDP growth. Imports contracted for the first time since the
fourth quarter of 2001, and the contribution of net exports turned positive. On
the other hand, the contribution of private domestic d emand declined
considerably, especially owing to the weakening in invest ments. Thus, annual
GDP growth in the third quarter decelerated significan tly down to 0.5 percent.
Moreover, seasonally adjusted figures suggest that quarte rly GDP growth was
negative in the second and third quarters of 2008.
7. Indicators on economic activity suggest that the adverse impact of the global
economic downturn on both domestic and aggregate demand has intensified
in the fourth quarter. Readings on production, capacity utilization, and
business confidence point to a marked contraction in economi c activity.
8. Ongoing problems in global financial markets have le d to a slump in consumer
confidence. Following the sharp drop in October, consumer confidence
indexes remained at low levels in November. The soften ing in consumption,
the tightening of financial conditions, and the reducti on in loan supply has
restrained credit growth. Accordingly, consumer loans slowe d down
considerably in October and November.
9. Other indicators for consumer demand also suggest a wea kening in the fourth
quarter. Domestic sales of automobiles plummeted in Octob er and November,
falling well below the third-quarter average. Moreo ver, seasonally adjusted
consumption indexes point to a contraction in private con sumer demand in
November. Imports of consumer goods, especially passenger ca rs and non-
durable goods, continued to trend downward.
10. Indicators remain weak for investments. In seasonally adjusted terms,
machinery-equipment production fell for the fourth qu arter in a row. Imports of
capital goods in October were below their third-quarte r average. Domestic
sales of commercial vehicles displayed a downward trend in October and
November, while Business Tendency Survey pointed to a si gnificant
deterioration in expected investment spending.
11. Besides the marked reduction in domestic demand, fore ign demand has also
significantly weakened due to the marked slowdown in glo bal economic
activity. Exports fell by 6.5 percent year-on-year in October and posted a steep
decline in seasonally adjusted terms. Exports of motor ve hicles − a key driver
of total exports − fell by 43.9 percent year-on-year in November. The
slowdown in imports has also intensified in October, which was down by 15.3
percent in year-on-year terms. Given the fact that imp orts declined at a faster
pace than exports, net foreign demand is expected to ma ke a positive
contribution to growth in the final quarter.
12. Data on labor market confirms the significant slowdow n in economic activity.
Non-farm employment remained flat in the third quar ter, resulting in a marked
rise in unemployment rate. The Committee emphasized t hat the labor market
conditions will continue to restrain domestic demand and labor costs.
Monetary Policy and Risks
13. Recent readings indicate that the slowdown in the d omestic economic activity
has intensified. Ongoing problems in international cred it markets and the
global economy are expected to continue to restrain bot h the domestic and
external demand for an extended period, putting dow nward pressure on
inflation. The disinflation in core price indices has bee n so far limited due to
the lagged impact of the exchange rate pass-through. Ye t, the Committee
expects a more significant deceleration in the underlyin g inflation as the
services inflation eases in the forthcoming period.
14. The developments in oil and other commodity prices are having a favorable
impact on disinflation. In fact, the contribution of en ergy and food prices is
down by 1.4 percentage points since June. Looking ahead, energy and food
prices are expected to continue to contribute to the disinflation process.
15. Although inflation expectations have shown signs of easing recently, they are
still above the medium term targets. The Committee ju dged that inflation
expectations will follow a downward trend in the fort hcoming period as the
deceleration in headline inflation becomes more signifi cant. In this respect, it
was stated that the Central Bank should put more emphasi s in its own inflation
forecasts.
16. In light of these assessments, the Committee judged t hat inflation would
display a rapid fall in the forthcoming period. Accordi ngly, the Committee has
decided to lower short-term interest rates by 125 basis p oints. The cumulative
rate cuts have reached 175 basis points in the last two months.
17. Considering the prevailing tightness in financial co nditions and the benign
inflation outlook, the Committee indicated that there was room for further
monetary accommodation. However, it was stated that, gi ven the existing
global uncertainties, it would be appropriate to main tain flexibility regarding
future policy decisions. In this respect, the extent and t he timing of the next
rate cut will depend on the factors affecting inflation outlook.
18. Uncertainties regarding the impact of the problems in financial markets on the
real economy remain at high levels. Recently, the fore casts on global
economic growth have been continuously revised downwards. Given that
factors affecting domestic inflation have been driven la rgely by global
developments, medium term inflation risks are seen mostly on the downside.
19. The Central Bank will continue to take the necessary measures to contain the
adverse effects of the global financial turmoil on the domestic economy,
provided that they do not conflict with the price stabi lity objective. Prudent
monetary policy is necessary but not sufficient to maintai n the resilience of the
economy against the global financial turmoil. Preservin g the fiscal discipline
and strengthening the structural reform agenda would a lso help to mitigate the
adverse effects of the ongoing shocks on the domestic economy . In this
respect, the European Union accession process and the implem entation of
structural reforms envisaged in the economic program rema in to be of utmost
importance. In particular, advances in structural reforms, which would improve
the quality of fiscal discipline and enhance productivity gains, are monitored
closely by the Central Bank with regard to their impli cations on
macroeconomic and price stability.