SUMMARY OF MONETARY POLICY COMMITTEE DISCUSSIONS
Central bank: tcmb | Type: decision | Date: 2007-01-04

No: 2006-55
04 January 2007
SUMMARY OF MONETARY POLICY COMMITTEE DISCUSSIONS
Meeting Date: 21 December 2006
Inflation Developments
1. While the consumer inflation increased by 1.29 percent i n November, the
annual inflation decreased compared to the previous mon th. The seasonal
increases in unprocessed food and clothing and footwear gr oup prices played
an important role in consumer inflation in November. Price increases in these
groups comprised about 0.94 percent of consumer inflation of November.
Meanwhile, housing group-oriented energy items display ed increases as well.
There has been some decline in the prices of consumer dura bles due to the
effects of the deceleration in domestic demand and the st able course of the
exchange rates.
2. The Monetary Policy Committee (Committee) noted that uncertainties pertaining
to unprocessed food prices continued. The rate of increase in unprocessed food
prices displayed a significant deceleration in the last fe w months. However, the
adverse weather conditions coupled with the decrease in a gricultural
production, especially in grain production, may affect f ood prices negatively in
the upcoming period. Within this framework, food prices continue to be a risk
factor for inflation.
3. The annual rise in the special CPI Aggregate-H excludin g the prices of energy,
unprocessed food products, alcoholic beverages, tobacco produ cts and gold,
reached 9.13 percent in November, remaining relativel y stable compared to the
previous month. As the increases in the prices of clothing group in the new
season has terminated, the primary effects of the exchang e rates were
completed to a great extent as of December. It is proje cted that the monthly
increases in H-index would decelerate in the upcoming pe riod compared to the
second half of 2006. However, it will take longer for the effects of supply shocks
that have been experienced in the previous period on annual change to
diminish. Accordingly, no significant decrease is expected i n inflation that is
calculated by the H- index until the second half of 2007.
4. The annual rate of increase in services prices still preserv es its course. The
house rents item, which continued to increase rapidly in November, constrained
the deceleration in services prices inflation. In line wi th the decrease in
domestic demand, annual price inflation in services group is expected to
slowdown in the upcoming period. Meanwhile, taking int o account the fact that
the pricing behavior in services sector is highly susceptible to wages, it is
believed that services prices continue to be a significant risk factor in terms of
attaining the medium-term targets.
Factors Affecting Inflation
5. The Committee considers that recent data is broadly consist ent with the outlook
presented in the October Inflation Report.
6. Indicators pertaining to private sector consumer demand p oint to a significant
slowdown. The decline in expenditures especially on consum er durables and
investment goods stands as an important factor in the deceleration of consumer
demand. In line with the deceleration in domestic dema nd, annual GDP growth
decreased to 3.4 percent in the third quarter, confirmi ng our earlier projections
that demand conditions would support the decline in inflation.
7. The deceleration in consumer demand in the third quart er can be attributed
both to the decline in consumer confidence and the fluctuations in the exchange
rates. The decline in private consumption demand halted as these effects
started to disappear as of the fourth quarter. Seasonal ly adjusted data suggest
that the decline in automobile sales observed in the third quarter stopped in
October-November period. The upward trend of sale of white goods continued
in this period as well. Consumer credits and consumption i ndices indicate that
the tendency to lose pace stagnated in November. The in dicators in the
Business Tendency Survey (BTS) related to the volume of sales in the domestic
goods market and the expectations regarding the amount of new orders
received from the domestic market for the next three mo nths do not point out a
slowdown in private consumption demand beyond the third quarter.
8. The foreign demand remains relatively strong. Due to the fact that exports
increased faster than imports in real terms in the third quarter of 2006, net
exports had a favorable impact on growth. Indicators p ertaining to November
and December 2006 indicate that the strong course of for eign demand
continues. Persistence of increases in partial productivity, continuation of the
vigorous economic activity in the EU, and the Euro gain ing strength against the
US dollar support the increase in exports. Foreign dema nd is expected to keep
its strong position in 2007 as well.
9. The value added of the industrial sector continued to i ncrease in the third
quarter of the year with the help of strong foreign demand. Even though the rate
of industrial production in October was low due to the effect of the religious
holiday in Ramadan, expectations of companies operating in production
industry and increase in utilization ratios in November indicate that industrial
production will display a strong trend in the fourth quarter as well.
10. The tightening in financing conditions, the increase in the relative prices of
investment goods and the anticipation of a deceleration in domestic demand
caused the investment demand to slowdown in the second ha lf of the year.
Seasonally adjusted data on the imports of capital good s and sales of
commercial vehicles displayed an upward trend recently, t hereby indicating a
possible recovery in the machinery-equipment investments in the last quarter of
the year. The BTS indicators support this outlook by sugg esting that there is no
obvious deterioration in investment expenditure tende ncy for the next twelve-
month period.
11. Construction permit statistics point out that construction i nvestments will
continue to grow. Even though it is remarkable that th e production of non-metal
minerals – which is one of the leading indicators of const ruction activities – has
decelerated, considering the fact that exports have decli ned and imports have
increased recently in this sector, the strong course of the construction sector is
expected to persist.
12. The public sector expenditures continued to increase in th e third quarter of
2006 and a similar tendency is anticipated for the last quarter as well. The
Committee closely monitors the effects of the adjustments in the incomes policy
and the developments in non-interest public sector expen ditures on inflation
and inflation expectations.
13. In summary, it is predicted that the deceleration in t he economy will not reach
the level of stagnation and the economic activity will gradually recover. In the
last quarter of 2006, the level of annual growth mig ht be low due to the high
basis effect in the same period of 2005. However, owing to the relatively strong
course of foreign demand and increases in public sector exp enditure items, the
slowdown in total demand is not expected be sharp and the annual growth rates
are estimated to increase beginning from the second half of 2007.
14. Productivity increases in private manufacturing industry continued in the third
quarter of the year. In the last quarter, the manufacturing industry workers index
is not expected to display a significant change, while th e increase in production
is estimated to strengthen slightly. In this framework, i t is expected that the
increases in productivity will persist in the last quarter of the year, as well and
that unit wages in the manufacturing industry will cont inue to support the
disinflation process.
15. The expectations that the main course of inflation will be downward in the
upcoming period remained strong in December, as well. T he inflation
expectations that displayed a scattered outlook in June an d July gained a more
consistent structure as of December. This development is consi dered to be an
indicator of the diminishing uncertainties regarding in flation. Nonetheless,
medium term inflation expectations continue to remain high above the targets.
Monetary Policy and Risks
16. The current level of inflation is well above the medi um term targets. It is
expected that the tight stance of the monetary policy will continue to restrain the
private consumption demand and pull down inflation gr adually. Nevertheless,
the ambiguities relating to the impact of the upward trend in non-interest public
expenditures on price dynamics together with the persiste nce of both high
expectations and uncertainties regarding services prices crea te the risk that
inflation will display stronger resistance against the di sinflation process than
17. The CBRT produces its medium term forecasts under the assum ption that
supply shocks will vanish in time. However, the current da ta indicates that
neither the risks related to energy prices nor those rela ted to unprocessed food
prices disappeared. As long as medium term expectations ar e not affected
unfavorably, the CBRT will not respond to the tempor ary fluctuations deriving
from these two factors that are beyond its control.
18. The likely changes in the global risk appetite and the new fluctuations that might
emerge in financial markets accordingly continue to be on e of the main risk
factors that might deteriorate the inflation outlook. In case such a risk
materializes and medium-term expectations are affected unfavorably, the CBRT
will not hesitate to tighten monetary policy through effective liquidity
management or policy rate revisions.
19. In the light of these developments, the Committee assesse s meeting the
medium term inflation targets would necessitate the mai ntenance of the
cautious policy stance and decided to keep policy rates uncha nged. Factors
such as the gap between the medium-term inflation expe ctations and the
targets, the risks related to services price inflation and the uncertainties in the
global economy require that the monetary policy maintain its tight stance.
20. The Committee closely monitors the lagged effects of the monetary tightening
since June. Moreover, the potential impact of the progr ess in the structural
reform agenda and the developments in the incomes poli cy as well as the non-
interest public sector expenditures on the inflation and the inflation expectations
are carefully evaluated. The CBRT will not hesitate t o tighten monetary policy in
case developments that would have unfavorable effects on medium-term
inflation outlook.
21. The continuation of the European Union accession process an d the
uninterrupted implementation of the structural reform s envisaged in the
economic program as planned are still crucial. The develo pments related to the
structural reforms that will enhance the quality of fisca l discipline in the medium
and long terms are monitored closely in terms of both macroeconomic and price
stabilities. Continued determination in implementing the decisive steps taken in
these areas in recent years will help the economy overcom e the adverse
changes in the international conjuncture at minimum cost.