SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-08-14

No: 2007-22
24 August 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: August 14, 2007
Inflation Developments
1. Consumer prices fell by 0.73 percent in July, bringin g annual inflation rate
down to 6.90 percent. The cumulative decline in annual inflation over the past
four months reached 4 percentage points.
2. Annual inflation in both the processed and unprocessed food groups
decreased in July. Despite the rise in annual inflation in vegetable prices in
July, annual inflation in the unprocessed food group de clined to 8.92 percent,
down by 4.3 percentage points from the previous month, thanks to continued
correction in fruit prices. Meanwhile, annual inflation in processed food prices
fell by 0.53 percentage points due to primarily last y ear’s base effect. In the
second half of 2006, processed food prices had surged signif icantly because
of the pass-through from depreciation in the local curre ncy (YTL) and owing to
price movements mostly in the bread and cereal products group.
3. Price developments in the energy group supported the disinflation process in
July. Despite the high level of crude oil prices in inter national markets,
domestic fuel prices displayed a decline on the back of strong YTL. In addition,
the favorable trend in the prices of utilities and othe r energy items for housing
group continued.
4. Consumer durables prices, which displayed a downward t rend in April-June
period, continued this favorable course in July as well an d annual inflation in
this group came down to minus 2.15 percent. Another not eworthy
development in July was the downturn in the annual inf lation of clothing and
footwear prices, after a period of successive price increases i n the first half of
5. The Monetary Policy Committee (the Committee) not ed the favorable
developments in services inflation since early 2007. The slo wdown in annual
services inflation became more pronounced in July. The monthly inflation rates
have declined in all sub-groups (rent, restaurants-hotels, transportation and all
other services) compared to the same month of the previous year. Annual
services inflation fell by 2 percentage points in the fir st seven months of 2007,
the restaurants-hotels group contributed most to this decl ine. The lowest
annual inflation among the main service expenditure gro ups was observed in
communication services with 3.50 percent. The impact of the rate cut in local
calls on communication services prices in late July will be ob served largely in
6. Notwithstanding the risks related to energy and food prices, inflation continues
to decelerate owing to the lagged effects of the strong monetary tightening.
Annual inflation in all core measures declined in July. This was mainly driven
by the favorable price developments for durable goods an d services. The
downward trend in the annual rate of increase of the mostly cited core
indicator-H (CPI excluding food, energy, alcohol-tobacco and gold) became
more evident in July. The seasonally adjusted monthly in flation measured by
using this index continued to slow down.
7. On the other hand, the Committee emphasized that the decline in
unprocessed food prices observed last year in August may not recur this year,
and consequently noted that food prices and the annual inflation rate might
display a temporary rise in August.
Factors Affecting Inflation
8. The Committee assessed that the recent data on economi c activity and
inflation are consistent with the outlook presented in t he July Inflation Report.
While private sector investment and consumption demand exhi bit signs of
recovery, external demand is moderating and aggregate d emand conditions
continue to support the disinflation process.
9. Leading indicators for the second quarter of the yea r suggest that private
consumption expenditures displayed a trend similar to the one in the first
quarter. The slowdown in domestic sales of white goods ob served since the
third quarter of last year continued in the second quar ter of 2007 as well.
Similarly, domestic sales of automobiles and imports of co nsumer goods
slowed down during this period. Moreover, the pace of r eal growth in
consumer loans was moderate compared to the first half of 2006. Hence,
private consumption spending, in seasonally adjusted terms, is expected to
increase moderately in the second quarter of the year co mpared to the first
quarter. On the other hand, June and July data on dom estic sales of
automobiles, various consumption indices and domestic sales of commercial
vehicles point to a recovery in private investment and consum ption demand,
starting from the third quarter of the year.
10. Investment spending displayed a moderate growth tre nd. While imports of
capital goods and production of electrical machinery incre ased in the second
quarter of the year, machinery-equipment production a nd sales of light and
heavy commercial vehicles decreased in seasonally adjusted ter ms compared
to the first quarter. Meanwhile, the fall in constructi on permits in the first
quarter compared to the same period of the previous yea r signals a relative
slowdown in construction sector. However, the construction in vestments may
continue to display high growth rates throughout the y ear, since current
construction investments are closely related to past construction permits.
11. In the first half of 2007, non-interest budget exp enditures increased noticeably
by 25.7 percent compared to the same period of 2006. T his development
indicates that public expenditures in recent months may ha ve restrained the
disinflation process. Based on the projected end-year bud get targets, non-
interest public expenditures are expected to slow down sign ificantly in the
second half of the year. Thus, it is likely that the stim ulus from the public
expenditures to the aggregate demand may cease in the se cond half of 2007.
It is of critical importance for the continuity of disinf lation process that potential
measures that may be taken to achieve the program-define d non-interest
budget targets would be implemented by cutting expendi tures rather than tax
adjustments and that incomes policy for 2008 is conducted i n harmony with
the medium-term inflation targets.
12. External demand maintained its strong course in the second quarter of the
year. In this period, exports increased by 13.2 percent i n annual terms.
According to the data announced by the Turkish Exporters A ssembly, the
strong performance of exports continued in July as well. T he robust course of
external demand and the competitive advantage brought b y productivity gains
are expected to support export growth in the near futur e. However, it is
expected that the strong base effect that will be effecti ve from September
onwards will restrain annual growth rate of exports.
13. The strong performance of exports has supported indust rial production.
Although year-over-year industrial production increased only modestly in June
due to the high base in the same period of 2006, season ally adjusted data
point to a moderate growth in the second quarter of t he year compared to the
previous quarter.
Monetary Policy and Risks
14. Domestic demand has significantly slowed down after the monetary tightening
in 2006. The slowdown in domestic demand is affecting in flation with a lag.
This effect is particularly noticeable in services prices. Alt hough domestic
demand may partly recover in the second half of the yea r, aggregate demand
conditions are expected to support the disinflation process —thanks to
declining contribution of net exports and the government spending. Therefore,
the underlying disinflation is expected to continue in t he upcoming period.
However, significant risks remain to the inflation outlook on both sides:
15. Volatile food prices lead to unpredictable movement s in headline inflation.
Moreover, bad crop of wheat poses risks on the consumer price s through the
prices of bread and grain products. The Central Bank doe s not react to the
temporary movements in unprocessed food prices, however close ly monitors
these developments since they can effect inflation expectations. It should also
be noted that the risks posed by the food prices are not one sided, as the base
effects may result in favorable surprises in the forthcoming period.
16. The stickiness in inflation expectations is considered as a n important risk to
the inflation outlook. Although the headline inflati on has been easing down
significantly in the past four months, inflation expectat ions of financial market
participants have not shown any improvement. Corporate se ctor expectations
are still significantly above the medium term targets de spite the downward
trend in the past couple of months. The prevailing gap between medium term
inflation expectations and the targets poses uncertainties on the wage setting
behavior—especially in the public sector—and hence the service prices,
pointing to the risk of a slower-than-envisaged pace of d isinflation.
Materialization of such a risk could result in a more caut ious policy than stated
in the July Inflation Report.
17. The Committee closely monitors the developments in the international liquidity
conditions and the credit markets. Recent market volatility has the potential to
effect inflation through several distinct channels: In the short term the
depreciation in domestic currency and the subsequent pass-through may have
an inflationary impact, although this impact would par tly be offset by the
decline in oil and other commodity prices driven by risin g concerns over the
outlook for global growth. On the other hand, the re cent developments in the
international liquidity conditions and the credit marke ts will contain the
downward trend in the bank lending rates, and also curb the banks’ appetite
for extending credit. Accordingly, likelihood of the mat erialization of the risk
that “domestic demand conditions may turn less supportive f or the disinflation
process, once the prevailing uncertainties fade out and th e long-term interest
rates continue to decline during the second half of the year”, as quoted in the
last months Summary of the Monetary Policy Committee Meeting, has been
18. In this respect, the Committee, as of the meeting d ate, maintained the policy
stance outlined in the Inflation Report, and thus envisioned a measured easing
starting from the last quarter of 2007. However, the C ommitte added that the
exact timing and the extent of the easing may vary depen ding on the incoming
information regarding global liquidity conditions, ext ernal demand, public
expenditures and other determinants of medium term inflation outlook.
19. The developments in the global markets and their re flections on the domestic
markets are closely monitored. The Central Bank will uti lize the available tools
to mitigate the adverse impact of developments in the gl obal markets on the
inflation outlook. Within this framework, the Committe e, during the meeting,
also assessed liquidity developments in the domestic money m arket, and
evaluated liquidity management strategies. The YTL liq uidity is expected to be
at sufficient levels in the forthcoming period. However, barring extraordinary
market fluctuations, the Central Bank, by using existing o pen market operation
tools, may regulate the liquidity levels on both sides w hen needed, to ensure
that the overnight rates in the money market stay close t o the Central Bank
borrowing rates.
20. Prudent monetary policy is necessary but not sufficien t for securing the
resilience of the economy to global shocks. The role of fi scal policy and
structural reforms are also critical in this process. In this respect, the European
Union accession process and the implementation of the struct ural reforms
envisaged in the economic program remain to be importan t for long-term
stability. Particularly, advances in structural reforms tha t would enhance the
quality of fiscal discipline are monitored closely with r egard to their effects on
both macroeconomic and price stability.