SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-06-16

No 2009 – 21 26 June 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: June 16, 2009
Inflation Developments
1. Consumer prices increased by 0.64 percent in May , while inflation fell to 5.24
percent year-on-year. Inflation was down across all subcategories, with
services prices registering an even more pronounced deceleration. Moreover,
the core inflation measures indicate that underlyin g inflation remains around
historic lows.
2. Annual unprocessed food inflation continued to t rend upward in May amid
accelerating fruit prices. After having declined as low as 0.63 percent in
February, annual unprocessed food inflation spiked to 13.59 percent in May,
and is likely to remain volatile in coming months. Meanwhile, after hitting a
record 25.50 percent in July 2008—amid supply short ages and rising import
prices—annual processed food inflation went down to 2.68 percent in May with
the reversal of previous unfavorable developments. Accordingly, inflation in
food and nonalcoholic beverages dropped to 7.63 percent year-on-year.
3. Annual energy inflation declined by 3.1 percenta ge points to 6.22 percent in
May due to the significant reduction in natural ga s tariffs and the ongoing fall
in solid fuel prices since December. Given the remo val of the base effect from
the marked increase in all subcategories of energy— particularly in electricity
and natural gas—during July and August 2008, annual energy inflation is
expected to decelerate further in the short run. Ho wever, higher crude oil
prices are likely to limit the downtrend in energy inflation.
4. Annual inflation in goods excluding energy and f ood fell to 1.44 percent in May,
owing to the decline in underlying inflation, the s lower price increases for the
latest season of clothing and footwear compared to a year earlier, and the high
base in furniture prices from a year ago. The impac t of the tax adjustments in
June on core goods inflation would depend on the ex tent to which they are
passed through prices.
5. Services inflation continued to slow down in May , falling by 0.83 percentage
points to 6.78 percent year-on-year. The rate of in crease of services prices
decelerated across all subcategories. Meanwhile, re nt inflation moderated
further, down to 9.49 percent year-on-year. Given t he softening in domestic
demand, annual services inflation is expected to ed ge further down in coming
6. Overall, the Monetary Policy Committee (the Comm ittee) expects annual
inflation to rise in June due to the base effect an d the tax adjustments.
However, the increase in inflation is seen to be te mporary given the one-off
nature of the factors affecting June inflation.
Factors Affecting Inflation
7. Recent data releases point to a partial recovery in economic activity. In
seasonally adjusted terms, the industrial productio n index in April and the
capacity utilization rate in May indicate that the downward trend in production
that began in the second quarter of 2008 ended duri ng the second quarter of
2009. While industrial production plummeted by 18.5 percent year-on-year, the
index rose by 0.5 percent month-on-month in seasona lly adjusted terms in
April. Furthermore, the private sector’s capacity u tilization rate in seasonally
adjusted terms was up by 1.0 percentage point durin g April-May period
compared to the first quarter. Nonetheless, the Com mittee members noted
that most of the recent increases in economic activ ity were attributable to the
short-term effects of the previously implemented fi scal measures. The
Committee indicated that there needs to be a robust revival in consumer
demand in order for the increases in the capacity u tilization rate to be
sustainable over the medium term.
8. Although consumer demand continued to rise in Ap ril and in May, it remains to
be seen whether this will turn into a solid recover y. The Committee noted that
consumer demand was stronger in the second quarter than in the first quarter
of the year in seasonally adjusted terms. Specifica lly, domestic automobile
sales, which were largely supported by the tax cuts, continued to rise in May in
seasonally adjusted terms, leading to an increase b oth in imports and
domestic production. The fiscal package also affect ed the domestic sales of
white goods, which accelerated during March and April. Similarly, consumption
indices remained elevated in April and May after markedly rising during March.
Having started to rebound in February, the producti on of chemicals and
furniture production, largely intended for the dome stic market, continued to
recover slightly in April.
9. Despite having fallen significantly year-on-year , imports of consumer goods
increased in seasonally adjusted terms during March and April, particularly
owing to the rebound in imports of passenger cars o n the back of the tax cut
introduced by the fiscal package. In contrast, the recovery in consumer non-
durable imports was quite limited.
10. Domestic investment demand continues to contrac t. The production of capital
goods fell in April in seasonally adjusted terms, w hile there has been some
recovery in capital goods imports since February. According to both production
and import figures, the investment demand for machi nery and equipment is
expected to slump further year-on-year in the secon d quarter. Demand
uncertainty and lower capacity utilization continue to suppress fixed capital
investments. Results of the Business Survey indicat e that recently investment
appetite continued to remain weak, although the pac e of deterioration has
slowed down during April and May. The Committee ind icated that the current
trend in investment demand is far from signaling a robust economic recovery.
11. Foreign demand remains weak. The export quantit y index dropped by 13.3
percent year-on-year in April. Coincident indicator s suggest that exports
decreased by about 40 percent year-on-year in May i n US dollar terms. The
Committee noted that the sharp contraction in expor ts during May can be
partly attributed to base effects, as the seasonall y adjusted data shows that
exports have remained flat since October 2008.
12. The softening of economic activity in general, and investment demand in
particular, continues to have a dampening effect on employment. Although
non-farm unemployment declined to 18.9 percent in M arch 2009 after hitting
19.3 percent during the first quarter of 2009, it c ontinued to rise in seasonally
adjusted terms. Applications for unemployment benef its in April and May
suggest that non-farm unemployment may continue to rise in the second
quarter in seasonally adjusted terms. The Committee expects that the high
rate of unemployment would restrain unit labor cost s and domestic demand in
the foreseeable future.
Monetary Policy and Risks
13. The Committee believes that resolving the probl ems in the global economy is
likely to take a considerable period of time. Altho ugh recent data releases
indicate that the worst may be over, the recovery i s expected to be protracted
given credit market problems and rising unemployment rates.
14. In light of these assessments, the Committee ex pects that the recovery in
domestic economic activity would be gradual, and la bor market conditions
would not improve anytime soon. Hence, the inflatio n rate is expected to
remain at low levels in the forthcoming period. Whi le inflation could rise in
June due to tax hikes and base effects, this increa se is expected to be
temporary.
15. Changes in monetary conditions affect economic activity and inflation with a
lag. Therefore, given the cumulative easing in mone tary policy since
November 2008, the Committee envisages that the nex t 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 downs ide risks still remain.
Accordingly, it seems necessary for monetary policy to maintain an easing
bias for a considerable period of time.
17. Although downside risks are still more signific ant, recent signs of recovery in
economic activity should not be discarded. Accordin gly, the Committee will
consider a deceleration in the pace of rate cuts or a pause should the
indications of an improvement in economic activity point to a robust recovery.
18. The Committee also assessed current and project ed Turkish lira liquidity
conditions. To facilitate the liquidity management of banks and to enhance the
transmission of monetary policy, the Committee appr oved the use of repos up
to three-month maturity as needed, in addition to t he main one-week repo
funding instrument.
19. The Committee indicated that despite recent inc reases, commodity prices are
still at low levels relative to last year, and ther efore imported input costs did
not exert significant pressure on inflation at this point. At the same time, the
Committee members noted that the possible future de mand increases for
commodities by emerging economies, including China and India, made
commodity prices very sensitive to speculation. The refore, potential
commodity price developments could present risks to inflation over the
medium term.
20. Another major factor affecting inflation and th e monetary policy outlook is the
stance of fiscal policy. Revenues continue to decli ne in line with the slowdown
in economic activity, while expenditures rise owing to countercyclical fiscal
policy, leading to a widening in the budget deficit . In this context, the
increasing financing requirement of the government might weaken the
favorable impact of monetary policy decisions on ec onomic activity. Given
these developments, the Committee members once agai n emphasized that, in
order to reap the gains from short-term expansionar y fiscal policy, it was
important to commit to a credible medium-term fisca l framework that would
underpin fiscal discipline and debt sustainability.
21. While necessary, prudent monetary policy is not sufficient to support the
resilience of the economy against the global crisis . Therefore, strengthening
the commitment to fiscal discipline and the structu ral reform agenda is also
critical for facilitating expectations management a nd for supporting the
effectiveness of the monetary policy decisions. In this respect, commitment to
the European Union accession process, and timely im plementation of the
structural reforms envisaged in the Pre-Accession E conomic Program remain
to be of utmost importance.