SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-05-14

No: 2009 – 18
27 May 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: May 14, 2009
Inflation Developments
1. Consumer prices increased by 0.02 percent in April, wh ile inflation fell to 6.13
percent year-on-year. Annual inflation was down month -on-month across all
major categories, suggesting a more broad-based decelerat ion in inflation
owing to the significant slowdown in economic activity.
2. Unprocessed food prices were down 0.95 percent in Apri l because of declining
fruit and vegetable prices. Yet, annual inflation in this category rose month-on-
month, albeit modestly, to 10.87 percent in April. Foreign demand for fruits and
vegetables has been relatively increasing since the final quarter of 2008. In
fact, the quantity of exported fruits and vegetables g rew by an average of 25.2
percent in the first quarter as compared to a year earl ier, which partially offset
the downward pressure on their prices owing to increased production. On the
other hand, annual processed food inflation decreased fu rther to 4.99 percent.
As a result, annual food and nonalcoholic beverages infl ation dropped to 7.70
3. Energy prices decreased by 1.42 percent in April amid reduced electricity
tariffs and falling bottled gas, solid fuel and fuel p rices. Accordingly, the rate of
increase in energy prices fell to 9.31 percent year-on-y ear. The reduction in
gas tariffs should help further slow the rate of increase in energy prices and
thereby is expected to push consumer inflation down by 0 .3 percentage points
in May. Given the current level of oil prices, the yea rly rate of increase in
energy prices could continue to slide in coming months.
4. Annual inflation in prices of goods excluding energy an d food dropped by 2.17
percentage points in April to 2.06 percent, largely du e to prices of durable
goods (excluding gold) which fell by 4.43 percent on th e back of Special
Consumption Tax (SCT) and Value-Added Tax (VAT) cuts. The effects of the
tax cuts were most pronounced during March and April. Acr oss the sub-
categories, the prices of furniture, automobiles and whi te goods fell by 7.63, 5
and 2.74 percent, respectively. Accordingly, inflation i n durable goods plunged
to –5.96 percent year-on-year. However, it must be em phasized again that
these tax cuts would only have a short-lived favorable effect on inflation as
they are due to expire in the following months.
5. Services prices continue to fall amid the sharp contract ion in domestic demand
and also because of the lagged effects of weakening cost pr essures. The
yearly rate of increase in services prices slumped to a hist oric low of 7.61
percent in April. The decline was evident across all subcat egories of services.
Annual services inflation is expected to edge further down in coming months.
6. Core inflation measures continue to trend downward, largely owing to the tax
cuts that have been in place over the past two months. P ut differently, the
recent sharp declines in the core inflation measures have been primarily
driven by the tax cuts, and therefore the rapid slowdo wn in these measures is
expected to be temporary. However, even without the contribution of these tax
cuts, core inflation measures still declined, supporting th e view that inflation is
still continuing on a downward path.
7. Overall, the Monetary Policy Committee (the Commi ttee) expects inflation to
decelerate further in the short run due to the softening in economic activity and
the past declines in oil and other commodity prices.
Factors Affecting Inflation
8. The latest data for the first quarter of 2009 confi rmed the continuing sharp
contraction in economic activity. Industrial production shr unk by 22 percent
year-on-year in this period and declined at a faster p ace than in the fourth
quarter of 2008 in seasonally adjusted terms.
9. Similarly, domestic investment demand contracted dram atically during the first
quarter of the year. In seasonally adjusted terms, prod uction and imports of
investment goods and sales of heavy commercial vehicles fel l sharply quarter-
on-quarter. In view of the low levels of resource util ization, and against the
backdrop of the ongoing uncertainty regarding the glob al economy, the
Committee expects investment demand to remain weak for quite some time.
10. Recent data releases indicate that there may be some rebound in private
consumer demand. The tax cuts that have been implemente d as part of the
fiscal package to help stimulate the economy have accelerat ed the depletion
of inventories since March. In April, the tax cuts had a partial effect on the
production of transport vehicles and machinery and equip ment, which account
for a significant share of the manufacturing industry. I n fact, domestic sales of
automobiles were much stronger in April than their fir st-quarter average in
seasonally adjusted terms. Moreover, consumer confidence in dices have also
gained some ground. Yet, the Committee members noted that some of the
rebound in domestic demand could be attributed to the price incentives
created by the fiscal package that brought consumer demand for selected
goods forward, and therefore, the pace and scale of the recovery in domestic
demand remains to be seen.
11. The private sector’s capacity utilization rate rose m onth-on-month in April for
the first time in a long time in seasonally adjusted te rms, suggesting that the
rise in domestic sales have started to support production. In addition, the
recent rebound in the business confidence index signals the possibility of a
partial recovery of economic activity going forward.
12. Although there have been signs of a partial recove ry in economic activity,
there is no sign of improvement in labor market conditi ons. Applications for
unemployment benefits remain high, indicating that un employment continues
to increase. On balance, the decline in non-farm employ ment and the high
level of the unemployment rate are both expected to put further downward
pressure on domestic demand and unit labor costs in the upcoming period.
13. Foreign demand remains weak. Exports continued to f all during the first
quarter of 2009 due to global recession. Furthermore, coincident indicators for
April and May exports do not point to a durable recov ery in foreign demand.
Although the Business Tendency Survey has shown a partial recovery
regarding expectations for foreign demand more recentl y, foreign demand
conditions are not expected to improve significantly wit hout a lasting
improvement in the global economic outlook.
Monetary Policy and Risks
14. In light of these assessments, economic activity and emp loyment are not
expected to recover anytime soon, suggesting that downwa rd pressures on
inflation are expected to last going forward. According ly, the Committee
indicated that these recent developments are consistent wi th the outlook
presented in the April Inflation Report and has thus d ecided to cut policy rates
by 50 basis points.
15. The Committee believes that the rate cuts have low ered the probability of
significantly undershooting the medium-term inflation targets. Recently,
improvement in global risk perceptions and expectations r egarding the future
course of policy rates have also contributed to the declin e in longer-term
interest rates to historically low levels. In this context , it should be highlighted
that changes in monetary conditions affect economic activit y and inflation with
a lag. Therefore, given the cumulative easing in mone tary policy since
November 2008, the Committee envisages that the next rate cut may be
16. However, the tightness in financial conditions still persist to some extent, and
uncertainties regarding the impact of the problems across financial markets on
the real economy are ongoing, suggesting that downside risks still remain.
Although recent indicators regarding the global economi c outlook suggests
that the worst may be over, it will nonetheless take som e time before the
global financial system recovers, and therefore a full r ecovery in economic
activity is not likely to be observed anytime soon. Accord ingly, it seems
necessary for monetary policy to maintain an easing bias for a considerable
period of time.
17. Another major factor affecting inflation and mone tary policy outlook is the
stance of fiscal policy. Budget revenues continue to declin e in line with the
slowdown in economic activity, while expenditures rise ow ing to
countercyclical fiscal policy, leading to a widening in th e budget deficit. The
increasing financing requirement of the government mig ht weaken the
favorable impact of monetary policy decisions on economic activity. The
Committee members hence reiterated that, in order to reap the gains from
short-term expansionary fiscal policy, it was important t o commit to a credible
medium-term fiscal framework that would underpin 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.