SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-06-16

No: 2008-16 26 June 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: June 16, 2008
Inflation Developments
1. Consumer prices increased by 1.49 percent in May and annual inflation rose to 10.74
percent. The rise in food and energy prices continu ed to be the major driver of
inflation, accounting for about 7 percentage points of annual inflation as of May.
2. The year-on-year rate of increase in food and no nalcoholic beverages surged to an
all-time high of 15.69 percent since the inception of the new consumer index in 2003.
Even though fresh fruit and vegetable prices displa yed some correction, inflation in
other unprocessed food prices continued to rise, dr iving up annual inflation in overall
unprocessed food to 8.26 percent in May. Yet, a fur ther correction in fresh fruit and
vegetable prices is likely to be observed in June a s well. Meanwhile, the processed
food prices continued to accelerate in May, pushing the group’s annual inflation as
high as 22.83 percent. Sub-groups, particularly bre ad and grain prices and prices for
oils and fats, continued to increase markedly. The annual inflation in processed food
prices is expected to remain elevated for some time.
3. Energy prices were up 0.77 percent in May to an annual rate of 17.70 percent, as fuel
prices rose by 2.58 percent due to record-high worl d oil prices. Domestic energy
prices are likely to continue increasing in the short term on the back of the adoption of
automatic price adjustment mechanism in setting electricity tariffs.
4. Inflation in goods excluding energy and unproces sed food increased by 1.35
percentage points to an annual rate of 9.90 percent in May, of which 7.40 percentage
points can be explained by the rise in processed food prices.
5. The impact of higher food and energy prices on s ervices inflation continued into May.
Prices for catering and transport services have shown a monthly increase of 1.82 and
1.79 percent, respectively, which together accounte d for almost half of the annual
services inflation rate of 9.86 percent. The Moneta ry Policy Committee (the
Committee) noted that prices for services other tha n catering and transport remained
relatively flat, and that the annual rental inflati on registered a decline of 6 points over
the past one year.
6. Core inflation indicators have continued to rise due to first and second round effects
of the ongoing supply shocks. The Committee stated that inflation is expected to
decelerate starting the final quarter of the year, although base effects are likely to
keep annual inflation at elevated levels in the short term.
Factors Affecting Inflation
7. Data available for the first half of the year su ggest an ongoing moderation in the
economic activity. During the first four months, in dustrial production was nearly
unchanged from the last quarter in 2007 on a seasonally adjusted basis.
8. The global credit crunch continues to restrain d omestic demand. The seasonally
adjusted CNBC-e consumption index continued to decl ine during April and May.
Domestic sales of automobiles and white goods and i mports of consumer goods also
indicate a similar picture. The Committee emphasize d that the chemical production,
which is sensitive to changes in domestic demand, f ell significantly in both monthly
and annual terms between March and April. Moreover, imports of consumer goods
were down from the first-quarter average in April in seasonally adjusted terms.
9. The CNBC-e consumer confidence index, which has been falling since the last
quarter of 2007, also remained weak in May. Moreove r, recent data indicate that real
consumer loans further moderated in April and May.
10. The Committee assessed that soaring food prices and ongoing uncertainties continue
to curb the domestic demand. Indicators from the Co nsumer Tendency Survey,
especially on households’ willingness to purchase s emi-durable and durable goods,
lend support for this assessment.
11. Global and domestic uncertainties have been slo wing down the investment demand.
The Committee noted that the number of newly establ ished firms has dropped over
the first half of 2008, indicating an ongoing moderation in business investment.
12. Despite the positive outlook for external deman d, machinery-equipment production
continued to flatten in April. The decline in domes tic sales of commercial vehicles
during the first quarter accelerated in April and M ay, confirming the slowdown in
investment demand. Imports of capital goods, which displayed a slowdown in the first
quarter, further continued to moderate in April on a seasonally adjusted basis.
13. After having remained flat in 2007 on the back of slowing construction activity, the
production of nonmetallic minerals grew by an annua l rate of 6.9 percent during
January-April 2008, making a positive contribution to industrial production. Although
the first-quarter rise in construction employment s uggests a rebound over the
previous year, tightening credit conditions and ong oing uncertainties are expected to
put more pressure on the housing market. In fact, h ouseholds’ willingness to
purchase a new house has been declining, as suggested by the Consumer Tendency
14. Labor market conditions improved slightly during the first quarter, mainly driven by the
manufacturing industry employment. In contrast, the service-sector employment has
slowed down further. Accordingly, the Committee ind icated that the recent trend in
non-farm employment contain the unit labor costs and consumer demand.
15. External demand has remained relatively strong. Seasonally adjusted figures indicate
that external demand in April was stronger compared to the first-quarter average. As
suggested by the robust pace of exports and the mar ked slowdown in imports, net
exports are expected to make a positive contributio n to economic growth during the
second quarter of the year.
16. In sum, recent readings on supply and demand co nditions have been largely in line
with the predictions of the April Inflation Report. Accordingly, aggregate demand
conditions continue to support disinflation.
Monetary Policy and Risks
17. The Committee reassessed the inflation outlook presented under three alternative
scenarios in the April Inflation Report. Recently t here have been favorable
developments in unprocessed food prices, while oil prices have followed a
significantly higher course than the prices assumed in the baseline scenario in the
April Inflation Report. Consequently, inflation is expected to decelerate starting from
the last quarter of the year, ending 2009 close to the 7.5 percent inflation target.
18. The Committee emphasized that tighter credit co nditions and the weakening in
consumer confidence have continued to moderate dome stic demand, hence
supporting disinflation. Relatively moderate pace o f inflation in services excluding
transport and catering—items sensitive to food and energy price developments—
support this view. Nevertheless, persisting supply side shocks continue to delay
disinflation, having adverse effects on inflation expectations. In this respect, monetary
tightening exercised in May and June should be perc eived as an attempt to
coordinate inflation expectations around the revise d targets and thus to prevent the
materialization of second round effects. Adverse impacts of the supply side shocks on
the economy will be more limited should the economic agents align their expectations
for the next three years with the target rates of 7 ,5 percent, 6.5 percent and 5.5
percent, respectively.
19. The Committee also assessed the liquidity proje ctions and the liquidity management
strategy. Excess liquidity sterilized in the overni ght market has been shrinking in the
second half of 2008 due to a reduction in the amoun t of FX purchased through
regular auctions, fall in Treasury’s foreign debt r ollover ratio, and rising money
demand. Accordingly, the Central Bank has provided the required liquidity into the
system via repo auctions, targeting overnight inter est rates to materialize at levels
close to Central Bank borrowing rate. Current projections do not point to a permanent
shortage in liquidity. Accordingly, overnight inter est rate in the money market will be
targeted to stay close to the Central Bank borrowin g rate in the forthcoming period.
Hence, Central Bank’s overnight borrowing rate will continue to be the key policy rate.
20. Main risks to the inflation outlook can be listed as follows:
21. Developments in oil prices continue to pose ris ks on inflation all over the world. The
automatic adjustment mechanism in electricity tarif fs, to be launched soon, is likely to
further increase the domestic energy prices. Consid ering the ongoing uncertainties
regarding energy prices, the Central Bank will continue to provide the inflation outlook
under alternative scenarios.
22. The persistence of global inflationary pressure s is yet to be seen and the impact of
ongoing difficulties in the financial system on the overall economy still continues to be
a major source of uncertainty. A protracted period of global uncertainty has been
keeping risk appetite at low levels and leading to a slowdown in capital flows to
emerging markets. The Committee once again emphasiz ed that monetary policy
would not react to temporary fluctuations in financ ial markets, but will not hesitate to
implement the necessary monetary tightening should the volatility in the financial
markets translate into a generalized deterioration in the pricing behavior.
23. In sum, the Committee stated that ongoing uncer tainties and supply side shocks
continued to pose risks on inflation, and that the Central Bank would consider a
further measured rate hike when needed, so as to prevent the potential second-round
effects of such risk factors. Accordingly, upcoming data related to inflation outlook will
be monitored carefully. The extent and timing of a possible future rate hike will
depend on developments in global markets, external demand, fiscal policy
implementation, and other factors affecting the medium term inflation outlook.
24. Prudent monetary policy is necessary but not a sufficient condition for attaining price
stability. The support from fiscal policy and struc tural reforms are also critical in this
respect. Preserving the resilience of the economy, especially under current
conditions, requires the continuation of fiscal dis cipline and structural reforms. In this
respect, the European Union accession process and t he implementation of structural
reforms remain to be of utmost importance. In parti cular, advances in structural
reforms, which would improve the quality of fiscal discipline and enhance the
productivity, are monitored closely with regard to their implications on macroeconomic
and price stability.