SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-02-19

No: 2009 - 09
03 March 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: February 19, 2009
Inflation Developments
1. Consumer prices increased by 0.29 percent in Jan uary, and inflation dropped
to 9.50 percent year-on-year. Exchange rate pass-th rough remained low
owing to the marked slowdown in economic activity, while easing oil and other
commodity prices continued to help bring inflation down.
2. Unprocessed food prices continued to rise wherea s processed food inflation
remained on the decline. Unprocessed food price inf lation is expected to ease
in the short run due to favorable weather conditions and weak foreign demand.
On the processed food prices front, annual inflatio n is expected to remain on a
downward path in the first half of 2009. Accordingl y, food prices will continue
to contribute to disinflation in the coming months.
3. Annual energy price inflation dropped by a cumul ative 16 points to 15.02
percent in the last three months on falling oil and other commodity prices.
Energy price inflation will continue to fall with t he reduction in natural gas rates
in February, which will have around 0.3 percentage points downward
contribution to inflation.
4. Annual inflation in goods excluding energy and f ood increased by 1 point to
4.74 percent in January. After displaying a sharp d rop in December due to
early seasonal discounts, clothing prices decreased at a less marked pace in
January than in previous year, pushing the group’s annual inflation up in
January. Meanwhile, the ongoing weakening in econom ic activity continued to
mitigate the exchange rate pass-through on prices o f durable goods.
Accordingly durable goods inflation increased only slightly to an annual rate of
3.46 percent in January.
5. Inflation in services declined to 9.89 percent i n January. The significant
slowdown in annual services inflation suggests a do wnward course in the
underlying inflation trend. Plunging world oil pric es have brought transport
inflation down, while weaker domestic demand and lower food prices have had
a favorable impact on catering prices. Rent inflati on eased further in January.
Given the continued softening in domestic demand, annual inflation in services
is expected to moderate further.
6. Overall, the Monetary Policy Committee (the Comm ittee) expects inflation to
decelerate at a faster pace in the coming months, t hanks to the fall in
underlying inflation and the favorable base effect.
Factors Affecting Inflation
7. Recent readings suggest that economic activity c ontinues to weaken.
Industrial production, which has been on the fall i n seasonally adjusted terms
since July, displayed a sharp contraction in the fi nal quarter. Readings on
capacity utilization and other key indicators point to a further decline in
industrial production in January.
8. Readings on the labor market confirm the sharp w eakening of economic
activity. In the fourth quarter of 2008, non-farm e mployment fell quarterly on a
seasonally adjusted basis, and non-farm unemploymen t surged rapidly. The
fall in non-farm employment can be attributed not o nly to the slowdown in
overall economic activity but also to the sectoral shock driven by the sharp
decline in exports. The number of people receiving unemployment benefits
increased markedly in January, suggesting that the rise in unemployment
accelerated in early 2009. In light of these assess ments, the Committee noted
that non-farm unemployment might display a historic high in the first quarter.
9. Recent readings indicate that although consumer sentiment has shown signs
of recovery, it has remained low by historical stan dards. Automobiles sales
displayed a contraction in annual terms since June, whereas they increased in
December and January in seasonally adjusted terms. Consumption indices
followed a similar pattern, showing a slight recove ry in January. The
deterioration in consumer confidence stopped in Dec ember-January period,
while housing and personal loans have displayed sig ns of recovery recently.
However, the Committee noted that it would be too e arly to make a conclusive
statement whether these indicators point to a long lasting recovery.
10. Indicators for investment demand continued to d isplay a weak course.
Production and imports of capital goods dropped dra matically in the final
quarter of 2008, both in annual and quarterly terms . The Committee indicated
that the recovery in investment spending would take time, given the historically
low capacity utilization rates.
11. Industrial production indexes in advanced economies registered a sizable drop
in December and foreign demand remained weak on slo wer global growth.
Accordingly, the export quantity index continued to fall in December, posting a
steep quarterly drop in the fourth quarter of 2008. Nominal export figures on
January and February suggests that the weakening of foreign demand
continued into the first quarter.
Monetary Policy and Risks
12. Problems in international credit markets and the global economy persist, while
new information lead to further downward revisions in the forecasts for global
economic outlook. Uncertainties regarding the impac t of the problems in
financial markets on the real economy remain high. In this context, domestic
and foreign demand are expected to stay weak in th e near term, and thus it
will take some time for the economic activity to re cover. Therefore, downward
pressures on inflation are expected to prevail.
13. The Committee indicated that the recovery in cr edit would be slow, reflecting
tight financial conditions both in domestic and ext ernal terms. Besides,
disposal income growth is expected to remain subdue d, given the moderating
employment growth and weakening labor market condit ions. Therefore, the
recovery in domestic demand is expected to be gradu al and slow, which is
also supported by the recent readings on domestic economic activity.
14. The fall in oil and other commodity prices are having a favorable impact on
inflation, and thus contributing to the decline in inflation expectations.
Recently, survey based medium term inflation expect ations have been lower
than the inflation targets. The Committee expects a rapid deceleration in
inflation in the short term with more significant c ontribution of easing energy
and food inflation. This should also bring down inflation expectations further.
15. Looking ahead, it is anticipated that developme nts in both the aggregate
demand conditions and the real marginal costs will drive down inflation
significantly in the forthcoming period, bringing i nflation to the target levels
sooner than envisaged. Judging that inflation is li kely to undershoot the target
significantly at the end of the year, the Committee decided to lower short-term
interest rates by 150 basis points. In line with th e baseline scenario at the
January Inflation Report, the Committee stated that the amount of the next
rate cut would likely be less than the current one and reiterated that the extent
and the timing of a possible future rate cut would depend on the factors
affecting the inflation outlook.
16. Business loan rates have responded less to the policy rate cuts compared to
the consumer loan rates. Accordingly, the spread be tween business loan rates
and the policy rates have remained at significantly high levels. In this respect,
the Committee indicated that the tightness in finan cial conditions still persist to
some degree, notwithstanding the recent policy rate cuts. Credit supply
remains tight and a significant part of the credit demand by firms can be
attributed to debt restructuring. Therefore, the ro le of the credit channel in
facilitating economic activity remains limited. Dev elopments in credit markets
are closely monitored as a coincident indicator for economic activity and also
in terms of their importance for the transmission of monetary policy.
17. It is worth to mention that a critical assumpti on underlying the inflation and
monetary policy outlook outlined above is that gove rnment fiscal stance will
remain neutral in cyclically adjusted terms. In oth er words, the baseline
scenario envisages that government expenditures wil l evolve in line with the
official projections, while tax revenues will moder ate as implied by the cyclical
downturn. Any significant deviation from this frame work may lead to a revision
in the outlook for inflation and monetary policy.
18. The Central Bank will continue to take the nece ssary measures to contain the
adverse effects of the global financial turmoil on the domestic economy,
provided that they do not conflict with the price s tability objective. In this
context, the Committee underscored the importance of maintaining the smooth
functioning of the financial system and the efficient operation of credit markets,
and reached a consensus on implementing additional measures regarding the
foreign exchange liquidity.
19. Prudent monetary policy is necessary but not su fficient to maintain the
resilience of the economy against the global crisis , especially under current
conditions. The Committee noted that the rise in th e public sector borrowing
requirement throughout the year 2009 could undermin e the effectiveness of
monetary policy by weakening the impact of policy d ecisions over the longer
end of the yield curve. Strengthening the commitmen t to fiscal discipline and
structural reform agenda is critical for facilitati ng expectations management
and also for enhancing the simulative impact of the monetary accommodation.
In this respect, commitment to the European Union a ccession process, and
timely implementation and revision of the structura l reforms envisaged in the
Medium Term Program remain to be of utmost importance.