SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-10-22

SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: October 22, 2008
Inflation Developments
1. Consumer prices increased by 0.45 percent in September , and annual inflation
fell down to 11.13 percent mainly with the significant easing in annual food
price inflation. The contribution of food and energy prices to annual inflation
declined to 7 percent in September.
2. Deceleration in food prices became more pronounced in September. Food
inflation decreased by a cumulative 4.2 points in the last two months to 11.07
percent year-on-year. The decline in fresh fruit and v egetable prices, driven by
higher production compared to a year ago, has led to f urther slowdown in
unprocessed food prices. In addition, after a drought-dr iven persistent
increase over the past twelve months, pulse prices finally declined in
September, which was another key driver of the downwar d trend in
unprocessed food prices.
3. Processed food prices fell by 0.29 percent, which is the lowest September
inflation for this sub-group in recent years, leading t o a substantial reduction in
its annual inflation, as predicted in the previous Summ ary of the Monetary
Policy Committee (the Committee) Meeting. In view of higher agricultural
production and lower international prices, the Committee reiterated that annual
processed food inflation would continue to ease in the r emainder of the year.
The Committee also noted, however, that inflation ma y display a modest and
temporary rise in October due to volatile vegetable prices.
4. Energy price inflation dropped by 0.6 points in Se ptember to 26.79 percent
year-on-year. Although world oil prices have plummete d recently and fuel
prices have moderated, sharp increases in prices of solid fu els –21.22 percent
in the last three months– curbed the downward trend in energy price inflation.
The hike in natural gas and electricity rates is expected to put upward
pressure on energy prices in October, with a contribution of 0.27 points to CPI
inflation.
5. The annual inflation in prices of goods excluding en ergy and food remained
stable for the third consecutive month, at 4.17 percent. In the clothing group,
domestic and foreign demand conditions have limited inf lation. Prices of
durable goods fell slightly in September after a steep decline over the past two
months, while the base effect drove the group’s annual inflation up by 1
percentage point. Given the depreciation of the new T urkish lira (YTL) and the
low base from the fourth quarter in 2007, the annual inflation in prices of
durable goods is expected to rise further in the final quarter.
6. Services inflation continued to increase on the back of rising prices of
transport and communication services. Lagged pass-through e ffects of former
upswings in oil prices continued to put upward pressure on prices of transport
services via rising school bus rates. Meanwhile, the annual rate of increase in
prices for communication services went up to 9.10 percent d ue to surging
fixed-line tariffs and mobile call rates. On the other hand, annual rental
inflation remained on a steady decline.
7. CPI excluding energy, unprocessed food, tobacco and go ld (the H index),
went slightly down year-on-year, while inflation measured by the I index, which
further excludes processed food prices, increased by 0.2 per centage points.
Recently, both indexes have risen at a slower pace in mo nthly seasonally
adjusted terms compared to previous quarters, indicating a slowdown in the
underlying inflation.
Factors Affecting Inflation
8. Problems in international credit markets and in glob al economy have
continued to put restrain on domestic economic activity. I n August, industrial
production and manufacturing production dropped by 4 a nd 5.7 percent,
respectively, from a year ago. Production went down in almost all sub-
industries in August. Data on industrial production in Ju ly-August period and
on the manufacturing industry tendency survey in Septem ber suggest that
industrial production contracted in the third quarter. The weakening in
domestic and foreign demand will continue to have an a dverse impact on the
economic activity in the final quarter. In fact, motor vehicles, textiles and
clothing exports in the first three weeks of October have displayed a significant
fall. Besides, Business Tendency Survey results regarding t hree-month ahead
expectations for sales and stocks of final goods also support the outlook
mentioned above.
9. Private consumption spending was flat in the third q uarter, as suggested by
the data on consumer loans, imports of consumer goods, consu mption and
confidence indices, and domestic sales of automobiles and wh ite goods. The
deepening global financial crisis indicates that credit con ditions may further
tighten. In fact, consumer loan growth for the first th ree weeks of October
confirms this picture.
10. Private investment spending continued to slow down in the third quarter. July-
August average of both imports and production of machin ery-equipment,
electric machinery and appliances and other non-metallic minerals was down
from a quarter earlier. Meanwhile, domestic sales of he avy commercial
vehicles and investment appetite in that industry have declined. In view of the
global financial turmoil, private investment spending is expected to slow down
in the fourth quarter.
11. In the second quarter, the moderation in imports h ad been more significant
than that in exports in real terms, resulting in a posi tive contribution from net
exports to growth. With a similar trend in external t rade as well as increased
tourism revenues, net exports are likely to continue to have a positive
contribution to growth in the third quarter. The exp ected slowdown in the
global economic activity, which led to a reduction in im port demand, especially
in advanced economies, poses a threat to Turkey’s export performance for the
upcoming period. Although the significantly increased sha re of exports to non-
EU member states and the US signals an increased potentia l for market
expansion, export growth is likely to decelerate in the coming months.
Moreover, the softening in domestic demand and the dep reciation of the YTL
will lead to a marked slowdown in imports in the fourt h quarter. Overall,
imports are expected to slow down at a faster pace than exports, which will
help net exports to support GDP growth.
12. In sum, recent readings indicate a significant slowdow n in domestic economic
activity. Ongoing problems in international credit mar kets and the global
economy will continue to restrain both domestic and exte rnal demand.
Accordingly, aggregate demand conditions will increasingl y support
disinflation.
Monetary Policy and Risks
13. The meeting agenda included an assessment of the inf lation forecasts to
appear in the October Inflation Report. The Committe e stated that inflationary
impact of the recent exchange rate movements would be o ffset by the
favorable outlook in food prices and the sharp decline i n oil prices. Therefore,
medium term inflation forecasts did not change significan tly compared to the
previous quarter.
14. Inflation is expected to display a limited and tem porary rise in October due to
volatile vegetable prices, yet continue to decline gradually in the medium term.
Accordingly, the Committee at this point does not envisi on a significant
revision in medium term inflation forecasts. However, i t should be noted that
the intensification of the financial market turmoil req uires caution in terms of
both the monetary policy and the inflation outlook. I n this respect, the
Committee decided to keep borrowing rates –the key poli cy rates– unchanged.
15. On the other hand, the Committee decided to lowe r the lending rates by 50
basis points in order to contain the potential volatili ty in the short-term interest
rates. It was noted that, since overnight rates may move towards the Central
Bank lending rates during times of temporary liquidity squeeze in the market,
narrowing down the margin between Central Bank lending and borrowing rates
would reduce the uncertainty regarding the overnight rates. This margin will be
narrowed further, the extent of which would depend on liquidity developments.
16. The meeting agenda also included an assessment of the developments in the
local foreign exchange markets. The Committee emphasized the essence of a
liquid foreign exchange market for a healthy financial system, and stated that
supporting the liquidity positions of the banks should be the priority under
current conditions. The Committee also suggested that ra ising the transaction
limits at the Foreign Exchange Deposit Markets would be helpful in this regard.
It was also agreed that other measures could be implemen ted if needed. In
this respect, it was noted that the Central Bank retains the option of
conducting foreign exchange sales auctions or direct interv entions, should
there be unhealthy price movements due to a loss of dep th in the foreign
exchange markets.
17. Looking ahead, credit conditions are expected to cont inue to tighten in the
forthcoming period. Regarding the inflation outlook, these developments
create upside risks through potential portfolio movements in the short term, but
downside risks through weaker aggregate demand in the me dium term. Given
the uncertainty surrounding the global economic outlook, monetary policy
needs to be flexible on either side. Therefore, futur e monetary policy decisions
will depend on the impact of the ongoing global fina ncial turmoil on the
domestic economy.
18. Commodity prices continue to be volatile, creating risks to the inflation outlook.
Despite the downward revision in projections for food a nd energy prices, our
main scenario is still based on quite conservative assumptio ns, implying that
the risks are on both sides. Should the upside risks materia lize, monetary
policy will be conducted so as to minimize deviations fro m the targets.
Downward surprises in food and energy prices, on the oth er hand, will be
perceived as an opportunity to bring inflation down a t a faster pace than
implied by our medium term targets.
19. Finally, a critical underlying assumption for the i nflation and monetary policy
outlook outlined above is that government expenditure s and incomes policy
will evolve in line with the official projections, and that there will be no further
increases in indirect taxes or administered price adjustmen ts, except those
required by the automatic pricing mechanisms in place. In particular, this
means any needed tightening in the fiscal balance would occur largely through
expenditure cuts rather than higher excise taxes. Any de viation from this
framework may lead to a revision of the outlook for in flation and monetary
20. The Central Bank will continue to take the necessary measures to contain the
adverse effects of the global financial turmoil on the domestic economy.
Future policy decisions will largely depend on the deve lopments in global
markets and their reflections on the global financial markets.
21. Prudent monetary policy is necessary but not sufficien t to maintain the
resilience of the economy against the global financial t urmoil. Preserving the
fiscal discipline and strengthening the structural reform agenda would also
help to mitigate the adverse effects of the ongoing sho cks on the domestic
economy. In this respect, the European Union accession proce ss and the
implementation of structural reforms envisaged in the e conomic program
remain to be of utmost importance. In particular, adva nces in structural
reforms, which would improve the quality of fiscal discip line and enhance
productivity gains, are monitored closely by the CBT wi th regard to their
implications on macroeconomic and price stability.