SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-04-16

No: 2009-16
29 April 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: April 16, 2009
Inflation Developments
1. Consumer prices increased by 1.1 percent in March, pushi ng inflation up to
7.89 percent year-on-year, largely due to the sharp r ise in unprocessed food
prices, as stated in the press releases from the Monetary P olicy Committee
(MPC) last month.
2. Unprocessed food prices were up 8.58 percent in March, and annual inflation
in this category climbed to 10.20 percent. After rising at a more moderate pace
in the first two months of 2009 as compared to previous years, fresh fruit and
vegetable prices soared by a remarkable 16.99 percent in March, far beyond
seasonal patterns, owing to unfavorable weather conditi ons and the relative
increase in foreign demand for these products. Meanwhile , the annual rate of
increase in processed food prices continued to fall in March because of the
decline in bread and grain prices driven by lower whea t prices, and annual
processed food inflation dropped by 3.2 percentage poin ts to 8.30 percent. In
sum, with the steep increase in unprocessed food prices, ann ual food and
nonalcoholic beverages inflation surged to 9.18 percent in March from 6.16
percent in February, despite falling processed food prices.
3. Energy prices were nearly unchanged in March, and an nual inflation in this
category eased to 12.59 percent. The marked slowdown in solid fuel prices
during the past two months continued into March, while fuel prices increased
due to rising exchange rates and crude oil prices. Howeve r, despite the recent
uptick, current crude oil prices are still well below thei r year-ago levels,
suggesting that the annual rate of increase in energy p rices will continue to
slow down in the short run.
4. Prices of goods excluding energy and food remained f lat in March. Although
prices of tobacco products increased by 7.34 percent, annual inflation in this
category dropped by about 1 percentage point to 4.23 percent on the back of
the cuts in the Special Consumption Taxes (SCT) in durab le goods and the
softening in annual clothing inflation. In the durabl e goods subcategory
(excluding gold), prices dropped by 3.95 percent, while annual inflation
slumped to –0.95 percent. With the SCT tax cut, prices o f automobiles and
white goods fell by 6.37 and 6.85 percent, respectively . Moreover, the three-
month Value Added Tax (VAT) cut on furniture and IT products announced in
April will put some additional temporary downward pr essure on durable goods
inflation. However, the Committee noted that exchang e rate movements might
have a lagged impact on prices of durable goods followi ng the depletion of
inventories.
5. The slowdown in services prices that started in the fin al quarter of 2008
continued into March, and annual services inflation fell by around 1
percentage point to 8.29 percent. With the lagged imp act of the sharp
contraction in domestic demand, the rate of increase in se rvices prices eased
across all subcategories. In particular, annual rent infla tion continued to fall at
a more solid pace.
6. The decline in the core inflation measures since the f ourth quarter of 2008
continued into March, which resulted from the downtrend in underlying inflation
and, partly, from the SCT tax cuts in March. Yet, even without the contribution
of tax cuts, underlying inflation is still falling. Apa rt from the SCT tax cut, the
VAT cut, effective in April, will also put some downwar d pressure on core
inflation. However, it should be emphasized again tha t this impact will most
likely disappear by the time these tax cuts expire, which are therefore
expected to cause fluctuations in the core inflation measu res over the short
7. Overall, the downtrend in inflation became more p ronounced in the first
quarter of 2009 on the back of the sharp contraction in economic activity.
Furthermore, owing to the cumulative decline in oil a nd other commodity
prices, inflation is expected to decelerate at a more rapid pace in the short run.
Factors Affecting Inflation
8. Recent readings suggest that economic activity continued to weaken in the
first quarter of 2009. In this period, domestic demand fell rapidly, while foreign
demand remained subdued. Accordingly, industrial product ion shrunk by 22.5
percent year-on-year during the January-February peri od. Moreover, the
contraction, in seasonally adjusted terms, was deeper than the previous
9. Recent data releases indicate that tax cuts on selected goods, which are part
of the fiscal package, helped to stimulate domestic sales. D omestic
automobile sales rose by a record 82 percent month-on-mo nth in seasonally
adjusted terms and recorded the first yearly increase since May 2008.
Similarly, domestic demand indicators such as imports of consumer goods and
domestic sales of household appliances were significantly hi gher in March.
The Committee indicated that the partial rebound in consumer demand does
not point to a long-lasting recovery, and is rather a result of the price
incentives created by the fiscal package that brought consum er demand for
selected goods forward.
10. Foreign demand remains weak as of the first quarter . Because of slowing
economic activity and falling energy prices, imports drop ped at a more rapid
pace than exports and the foreign trade deficit kept na rrowing dramatically
since the third quarter of 2008. Thus, the Committee m embers noted that
there is an increasingly lower external financing need given the positive
current account balance.
11. The Committee pointed to the negative implicatio ns of the economic
contraction for the labor market. The slowdown in non-f arm employment
growth has intensified during the December 2008 and Fe bruary 2009 period.
Accordingly, non-farm unemployment increased by 5.3 percentage points from
a year earlier to 19 percent in this period, and tota l unemployment rose by 3.9
percentage points to 15.5 percent. Increasing labor force participation partly
contributed to the surge in unemployment rates. On bal ance, the rise in
unemployment rates is expected to put further downward pressure on
disposable income and unit labor costs for quite some time.
12. In view of recent readings, the Committee indicate d that the rate of growth
might register a double-digit decline in the first qua rter of 2009. Yet,
confidence indices and coincident indicators of demand expe ctations suggest
that the economy may start to recover slightly by the se cond quarter of the
Monetary Policy and Risks
13. The Committee reviewed the forecasts and the under lying assumptions to be
published in the Inflation Report on April 30th. Com mittee members indicated
that international credit markets continued to be under strain and that there
were no clear signs of a durable improvement in the gl obal economic outlook.
In the January Inflation Report, it was assumed that th e recovery in the global
economy would start at the beginning of 2010. However , data releases since
then have indicated a sharper contraction in 2009, and a more gradual
recovery throughout 2010. Therefore, compared to the previous report, the
revised forecasts are based on a deeper downturn in 2009 , and a more
gradual recovery in the global economy.
14. In light of these assessments, the Committee concluded that the probability
attached to the early recovery scenario in the January I nflation Report has
diminished considerably. It was therefore agreed that, besides revising the
baseline scenario, it would be appropriate to present a n alternative scenario
that envisages a more gradual recovery than in the baseline.
15. During the last quarter of 2008, the collapse of p roduction has been
disproportionately severe for export-oriented firms, a nd—along with increasing
labor force participation rates—has brought about a surge in the
unemployment rate. Moreover, recent indicators suggest t hat employment
losses have continued during the first quarter of 2009. Therefore, labor market
conditions are expected to contain unit labor costs and cur b domestic demand
in the period ahead.
16. Lower policy rates and expansionary fiscal policy have started to provide some
stimulus to domestic demand. However, the Committee ant icipates that it will
take some time for the global economy to stabilize and thus the recovery in
aggregate domestic activity is expected to be gradual. Accordingly, Committee
members stated that aggregate demand conditions should su pport disinflation
more forcefully, and for a longer period of time tha n envisaged in the previous
17. In light of these assessments and the partial improve ment in some risk
indicators, the Committee has decided to cut policy rates by 75 basis points.
The Committee has indicated that the rate cuts have low ered the probability of
significantly undershooting the end-year inflation tar get. Therefore, it was
stated that the next rate cut would likely be measured. However, financial
strains persist, and there is still a significant amount of uncertainty regarding
the feedback between the financial and real sectors, sugge sting that downside
risks still remain. In this respect, the Committee envisage s that it may be
necessary for the monetary policy to maintain an easing bias for a
considerable period.
18. The stance of fiscal policy is another major factor th at may affect the outlook
for inflation and monetary policy. Recently, budget revenues have been
declining in line with the slowdown in economic activity , while expenditures
have been accelerating due to countercyclical fiscal policy, leading to a
significant rise in the budget deficit. Possible adjustmen ts in excise taxes
and/or administered prices in order to stabilize the bu dget could result some
inflation volatility over the short term. Moreover, the increasing financing
requirement of the government might weaken the favor able impact of
monetary policy decisions on economic activity. The Commit tee members
hence reiterated that, in order to reap the gains fro m short-term expansionary
fiscal policy, it was important to commit to a credible m edium-term fiscal
framework that would ensure fiscal discipline and debt sustainability.
contain the adverse effects of the global financial turm oil on the domestic
economy, provided that they do not conflict with the p rice stability objective.
Prudent monetary policy is necessary but not sufficient to maintain the
resilience of the economy against the global crisis. There fore, strengthening
the commitment to fiscal discipline and the structural ref orm agenda is also
critical for facilitating expectations management and fo r supporting the
effectiveness of the monetary policy decisions. In this resp ect, commitment to
the European Union accession process, and timely implement ation of the
structural reforms envisaged in the Pre-Accession Economic Pr ogram remain
to be of utmost importance.