SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-10-15

No: 2009 – 32
27 October 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: October 15, 2009
Inflation Developments
1. Consumer prices increased by 0.39 percent in Sep tember, while inflation
declined to 5.27 percent year-on-year. Core inflati on measures remained
subdued, whereas the annual rate of increase in ser vices prices continued to
fall steadily.
2. Annual inflation in food prices dropped slightly over the month to 6.79 percent.
The favorable course of fruit and vegetable prices during the past two months
continued into September, while meat prices acceler ated further. Taken
together, unprocessed food inflation eased to 16.70 percent year-on-year. In
the processed food category, prices continued to fa ll year-on-year. Looking
ahead, fruit and vegetable prices are expected to p ick up owing to seasonal
factors in October, while processed food prices are likely to remain on the
3. Energy prices rose by 0.63 percent in September amid rising tap water rates
and bottled gas prices. Accordingly, the rate of in crease in energy prices
climbed to 2.01 percent year-on-year. The hike in e lectricity tariffs, effective
October 1, would add about 0.4 percentage points to CPI inflation.
4. The annual rate of increase in prices of goods e xcluding energy and food
declined to 5.52 percent, owing to ongoing discount s on clothing and footwear
in September, in contrast with previous years. In t he durable goods (excluding
gold) category, prices rose by 0.20 percent in Sept ember, and inflation
increased to –1.37 percent year-on-year. It should be noted that prices of
durable goods are likely to rise markedly in Octobe r following the expiration of
temporary cuts in Special Consumption Tax (SCT) and Value Added Tax
5. Annual services inflation continued to fall in S eptember, down to 5.26 percent,
the lowest level in recent history. The drop was pa rticularly evident in rental
and transport services inflation. Under current dom estic demand conditions,
annual services inflation is expected to edge furth er down in coming months,
albeit at a more modest pace.
6. Overall, the Monetary Policy Committee (the Comm ittee) expects consumer
prices to accelerate temporarily in October due to seasonal increases in food
and clothing prices, the hike in electricity tariff s and tax adjustments on
durable goods. However, the Committee expects that annual inflation would
continue to hover around low levels.
Factors Affecting Inflation
7. In line with the Committee’s previous assessment s, recent data releases
indicate that the ongoing recovery in economic acti vity would be gradual and
protracted. During July-August, industrial producti on declined by 7.7 percent
year-on-year, yet registered a modest increase over the second quarter in
seasonally adjusted terms. Moreover, September’s ca pacity utilization data do
not point to an acceleration in production growth. Therefore, the Committee
noted that capacity utilization rates are not likel y to revert back to historical
averages over the short run.
8. Second quarter national accounts data confirm th at the fiscal stimulus-driven
recovery in domestic demand has been confined to ce rtain goods categories,
and therefore is likely to be transitory as previou sly stated. This outlook is also
supported by third-quarter indicators. The ongoing weakening of the demand
for non-durable goods is especially noteworthy, cau sing consumer goods
production to dip below its second quarter average during July-August in
seasonally adjusted terms. Similarly, imports of co nsumer goods were down
during July-August compared to the previous quarter . Accordingly, having
increased markedly during the second quarter, consu mption demand is
expected to display a weaker course in the third quarter.
9. Domestic investment demand remains weak. During July-August, the
production of capital goods was up from the second quarter, whereas the
imports of capital goods remained flat. Excluding t ransport vehicles, the
production of capital goods has also continued alon g a flat trend. Thus, the
Committee noted that the third quarter rise in the production of capital goods
has largely been the result of tax cuts, rather tha n a rebound in investment
10. Foreign demand remains weak. Growth forecasts, particularly for the euro
area, point to a more positive outlook for foreign demand over the short term
as of September, and expectations about the speed o f the medium-term
recovery have slightly improved, compared with the July Inflation Report.
Recent export figures are consistent with this outl ook. The export quantity
index rose sharply quarter-on-quarter during July-A ugust in seasonally
adjusted terms, but fell by 7.6 percent year-on-yea r. The medium-term outlook
for global growth suggests that it would take a lon g time for the GDP to reach
its pre-crisis levels across advanced economies. Th is outlook points to a
gradual narrowing of output gaps across advanced ec onomies, implying a
sluggish recovery of exports over the near term. Ac cordingly, the Committee
reiterated that foreign demand is likely to continu e to weigh down on
aggregate demand for quite some time.
11. The June-August data signal that non-farm emplo yment has ceased to
contract during the third quarter. During this period, despite having declined by
1.9 percent year-on-year, non-farm employment incre ased in seasonally
adjusted terms for the first time since the second quarter of 2008, driving
unemployment down from the second quarter in season ally adjusted terms.
The Committee agreed that, although employment indi cators show some
improvement, it remains to be seen whether this wou ld turn into a robust
recovery across the labor market.
12. The lack of a clear sign of durable global recovery and the ongoing uncertainty
about aggregate demand continues to cause companies to operate at low
capacity levels. In addition to low capacity utiliz ation and employment rates,
per capita hours worked also hovers below pre-crisi s levels. The Committee
expects the sluggish resource utilization and the r esulting idle capacity to
continue to adversely affect investment and employm ent decisions. On
balance, labor market conditions are likely to rema in a drag on domestic
demand, and thereby expected to continue supporting the decline in inflation.
Therefore, inflation is expected to remain at low l evels for a long period of
Monetary Policy and Risks
13. The policy rate cuts implemented since November 2008, and the
improvements in global risk perceptions have starte d to have favorable effects
on credit markets. In fact, consumer loan rates, wh ich were reacting rather
sluggishly to the policy rate cuts, have displayed a significant decline in this
period. Consequently, housing loans have displayed a stable upward trend
since September. More generally, the recovery in credit markets is expected to
continue throughout the last quarter. However, the effectiveness of the credit
channel in supporting economic activity has been so mewhat restrained owing
to the ongoing tightness in lending standards for t he small- and medium-sized
enterprises. In this respect, the Committee, after taking liquidity conditions into
consideration, has taken the view hat a limited red uction in Turkish Lira
reserve requirements would alleviate the tightness in credit conditions, and
thus enhance the effectiveness of the expansionary monetary policy.
14. While the Committee members noted the improveme nts in credit and labor
markets, they have come to the conclusion that thes e developments alone
were not sufficient to end the easing cycle. Yet, g iven the increased
perceptions that the economy had passed its turning point, it was indicated
that a slowdown in the pace of the rate cuts would be considered in the next
meeting depending on the economic data and developments.
15. Although recent data releases indicate that the worst is likely to be over,
concerns regarding the health of the global economy remain. In particular,
ongoing problems in credit and labor markets pose d ownside risks for global
activity. Should the global conditions deteriorate again, and consequently
another cycle of rate cuts. Lingering problems across the global economy are
not resolved completely and there are still uncerta inties regarding the strength
of the recovery. Taking these factors into account, the Committee reiterated
that it would be necessary for the monetary policy to maintain an easing bias
for a long period of time.
16. Another possible scenario, according to the Committee members, is a surge in
capital inflows to emerging markets owing to the relative improvement of credit
risk across these countries. Ample liquidity driven by the expansionary fiscal
and monetary policies on a worldwide scale, coupled with rising risk appetites,
have led to large capital inflows to emerging marke ts. Current slack in the
economy would imply that a fall in the cost of impo rted inputs could be rapidly
transmitted to consumer prices, suggesting that a f urther acceleration in
capital inflows may exacerbate downward risks on in flation. Realization of
such a scenario could lead to temporarily lower policy rates.
17. The CBT will continue to monitor fiscal policy developments closely while
formulating monetary policy. Enhancing the framewor k set out in the Medium
Term Program (MTP) through further structural adjus tments to strengthen
fiscal discipline, would support the improvement of Turkey’s sovereign risk.
Should the goals set out in the MTP be implemented, it would be possible to
keep policy rates at single digits throughout the forecast horizon.
18. The course of oil and other commodity prices co nstitutes another important
risk. Ample liquidity driven by countercyclical policies on a global scale creates
speculative movements not only regarding emerging m arket currencies, but
also for commodity prices. Therefore, oil and other commodity price
developments warrant caution, even under a scenario of a gradual global
economic recovery. Nonetheless, weak domestic deman d conditions would
limit the pass-through stemming from upside cost-pu sh shocks. Therefore, the
Committee will accommodate the short-term volatilit y in commodity prices,
especially when the resource utilization remains at depressed levels.
However, if an uptrend in commodity prices reflects a strong and durable
rebound in global activity that would in turn creat e inflationary pressures, then
monetary policy will react appropriately to keep in flation in line with medium-
term inflation targets.
19. The fact that the crisis itself, and the policy responses in reaction to it, are
unprecedented in recent history, creates risks rega rding the inflation and
monetary policy outlook. It is extremely difficult estimate with precision the
impact of the recent monetary policy measures taken at the global scale.
Although not having resorted to explicit quantitati ve easing eliminates some of
the risks for the Turkish case, it should still be noted that the full impact of the
cumulative easing of 1000 basis points since Novemb er 2008 would be seen
with a lag. In other words, although baseline scena rio does not envisage any
policy rate hikes for an extended period, it is important to monitor the impact of
the policies closely to ensure an appropriate timel y response to any
development not envisaged in above assessments.
20. The CBT has been taking the necessary measures to contain the adverse
effects of the global financial turmoil on the dome stic economy. However,
prudent monetary policy is necessary, but not suffi cient to maintain 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 thus for supporting the
effectiveness of the monetary policy decisions. In this respect, timely
implementation of the structural reforms envisaged by the Medium Term
Program and European Union accession process remain s to be of utmost
importance.