SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-03-27

No: 2007-07 27 March 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 15 March 2007
Inflation Developments
1. In February, consumer prices increased by 0.43% and the a nnual inflation rate
rose up to 10.16% The rise in annual inflation can be mainly attributed to (i) tax-
driven hikes in cigarette prices, (ii) early winter discou nts in clothing, (iii) rise in
processed food prices and (iv) the base effect of durable goods discounts of the
same period last year. These developments led to an incr ease in the annual
inflation of Special CPI aggregates, also suspending the downward trend of the
annual rate of increase of the H index (CPI excluding energy, unprocessed
food, alcoholic beverages, tobacco products and gold). But , the annual inflation
measured by the H Index is expected to resume its downwa rd movement
starting from the second quarter of the year.
2. After rising sharply in January, the annual inflation rate of unprocessed food
prices exhibited a partial correction in February. Yet, the inflation in
unprocessed food prices still remains very high. Energy pr ices, on the other
hand, retraced their earlier run-up by March, after a slowdown in January and
February, along with the recent upward movement in oil prices.
3. As regards the services group, the annual inflation of r ents, hotels-restaurants
and transportation services declined at a subdued level w hile the overall
services inflation remained relatively unchanged as annu al inflation in other
sub-items of the services group continued to rise.
4. Besides, the Monetary Policy Committee (the Committee) noted the possible
effects of administered price hikes on March inflation, wh ich was highlighted at
the previous meeting. The Committee foresees that the annual inflation might
thus temporarily rise in March but will start to decline gradually by the second
Factors Affecting Inflation
5. The Committee evaluates the recent data as broadly consistent with the outlook
presented in the January Inflation Report:
6. The slowdown in private consumer demand continues. Season ally adjusted
automobile sales fell in January and February, while sa les of white goods did
not change since the last quarter of 2006. In addition, the consumer confidence
indices do not suggest a noticeable change in semi- and no n-durable goods
demand for the first quarter of 2007. The leading in dicators on private
consumption demand also point that the seasonally adjuste d private
consumption will not reveal a significant change in the first quarter of 2007
compared to the last quarter of 2006.
7. Credit growth continued to slow down and so did the gr owth rate of other
monetary indicators. Although bank lending rates decline d gradually since late
January, the current financing conditions, together with the tight liquidity
conditions and the surging global volatility, continue to restrain credit expansion.
8. Investment demand and imports of capital goods did not change significantly
compared to the last quarter of 2006, whereas the sales of commercial vehicles
fell in January and February. On the other hand, the data on non-metallic
minerals production and imports point to an ongoing ro bust activity in
construction.
9. Foreign demand remains relatively strong. Exports keep growing as the
productivity in the manufacturing industry continues to rise and the European
economy preserves its robust economic activity, while impor ts are restrained by
the slowdown in growth rate. Accordingly, January’s trad e volume indexes
indicate that the growth rate in exports prevailed over imports. The ongoing high
rate of export growth in February and March, as revea led by the Turkish
Exporters’ Assembly figures, suggests that the foreign dem and continues to
have a positive contribution on the growth rate.
10. Despite the ongoing decline in domestic demand, industrial production keeps its
strength on the back of foreign demand, with an upswing in January mainly
driven by base effects and the number of business days. Ye t, controlling for
these factors does not change the fact that industrial pro duction still displays a
significant rise. Moreover, capacity utilization rates an d expectations of
February suggest that the production will continue to rise.
11. To sum up, the Committee judges that aggregate demand conditions continue
to support disinflation. Although economic activity is pr ojected to recover
gradually in the second half of the year, annual grow th rate in GDP will be low
in the second quarter owing mainly to base effects.
12. Recent data indicate that services employment growth cont inued to moderate
since mid-2006, which supports the slowdown in economic acti vity. On the
other hand, the co-existence of a remarkable slowdown in industrial
employment with strong industrial production in 2007 su ggests that labor
productivity continues to rise.
13. Developments in other cost factors do not display a nega tive outlook in
general. As the growth rate of the world economy becom es more balanced, the
crude oil prices display a more stable course. However, it is not possible to
make accurate projections regarding the oil prices in the medium to long-term.
Moreover, the recent fluctuations in metal prices confirm that risks related to the
commodity prices, as a whole, should not be disregarded.
14. Although the end-year inflation expectations displayed a slight upward
movement in March, medium-term inflation expectations remained unchanged,
yet significantly above the target. As inflation starts declining in the upcoming
period, the expectations will gradually converge to the target.
Monetary Policy and Risks
15. While taking monetary policy decisions, the Committee fo cuses on whether the
medium-term inflation outlook is consistent with the tar get. In other words, what
matters for the conduct of monetary policy is the evolut ion of inflation in the
medium run, rather than short-term temporary fluctuat ions. In this respect, a
one-off rise in March inflation, led by administered p rices, will not be crucial in
the decision-making process, as it does not alter the mediu m-term inflation
16. CBT has not changed its policy rates since August 2006. The reduction in the
risk premium and the improvement in inflation expectat ions have further
tightened the policy stance since then. The cautious stance of monetary policy
contained inflation expectations and thus the long-term interest rates. The
fluctuations in international financial markets in early March induced the interest
rates of government securities to rise. Yet, the interest rates came down soon,
as the volatility was short-lived. The downward moveme nt of bank lending rates
since January moderated thereafter.
17. In sum, a joint evaluation of the current policy stance and other factors affecting
inflation suggests that inflation will maintain a down ward course in the
upcoming period, converging to the targets in the medi um run. Yet, several
risks remain.
18. The main risk to the mid-term inflation outlook is the possibility of higher-than-
expected downward persistence in inflation, manifested l ately by the inertia in
inflation expectations and services inflation. The curren t level of inflation
expectations poses a risk to wage and price setting behavio r and, thus, to the
disinflation process. Moreover, services prices-related risks st ill prevail. Given
the relatively low productivity in the services sector, t he backward-looking price
setting behavior and the sensitivity of services prices to wage hikes, relatively
high services inflation should not fall as a surprise. How ever, even if these
factors are taken into account, the services inflation still needs to fall below its
current level in order to reach the medium term targe ts. The Committee, in this
regard, continues to closely monitor services price developments.
19. The uncertainty concerning the lagged effects of monetar y policy on aggregate
demand still remains a risk to the inflation outlook. Al though the impact of
monetary tightening exercised since June 2006 on private demand has become
noticeable recently, the cumulative impact is still to be seen. And the recent
increase in government spending adds to this uncertainty. In this respect, the
Committee closely monitors the indicators related to the overall economic
20. The Committe has frequently emphasized the fact that w aning risk appetite or a
possible fluctuation in liquidity conditions in global m arkets continue to pose a
risk against the inflation outlook. Indeed, the economic data announced in the
United States, Japan and China delivered another bout of volatility in
international markets in early March. Although these fl uctuations were short
lived and temporary, and did not deteriorate the in flation outlook, they indicate
that uncertainties related to global liquidity conditi ons may continue in the
period ahead. The Committee will not allow these possi ble fluctuations to have
adverse effects on the medium-term inflation outlook.
21. In light of these developments, the Committee has assesse d that meeting the
medium-term inflation targets requires the maintenance of a cautious policy
stance and decided to keep the policy rates on hold. The uncertainties in global
economy, the gap between inflation expectations and ta rgets and the risks to
services prices inflation necessitate keeping a tight policy stance.
22. The Committee closely monitors the lagged effects of the monetary tightening
since June 2006. Moreover, the potential impact of the progress in the structural
reform agenda and developments in incomes policy as well as public sector
non-interest expenditures on inflation and inflation expectations are carefully
evaluated. Should any adverse developments affecting t he medium-term
inflation outlook presented in the January Inflation R eport arise, the Central
Bank will not hesitate to further tighten the monetary policy stance.
23. The continuation of the European Union accession process an d the sustained
implementation of the structural reforms envisaged in t he economic program
remain of critical concern. Developments in structural ref orms that would
enhance the quality of fiscal discipline in the medium a nd long run are closely
monitored both in terms of macroeconomic stability and p rice stability.
Continued determination in implementing the decisive steps taken in these
areas in recent years will strengthen the resilience of t he economy against
possible changes in the global conjuncture.