SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-04-27

No: 2007-09
27 April 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 18 April 2007
Inflation Developments
1. In March, consumer prices increased by 0.92% and the an nual inflation rate
rose up to 10.86%. The relatively high cumulative inf lation in the first quarter can
be mainly attributed to soaring fruit and vegetable prices and tax-driven price
hikes in tobacco products. Surging tobacco prices pushed total consumer inflation
up by 0.5 percentage points. The moderation in annua l inflation of unprocessed
food prices in March was basically driven by descending pri ces of items other
than fruits and vegetables. The 11.74% rise in unprocessed food prices in the first
quarter, due to an increase in fruit and vegetable pr ices above seasonal norms,
highlights that the risks related to price developments i n this group are still
2. The increase in the prices of petroleum products acceler ated in March parallel
to the developments in the global oil market, but the annual inflation in the energy
component of the housing subgroup eased. The first quart er rise in the overall
energy index remained more modest compared to the previous year.
3. Annual goods inflation ascended in the first quarter , mainly due to the base
effect resulting from the decline in prices of particular ly durable goods associated
with the appreciation of TRY in the first quarter of 2006. Moreover, first-quarter
discounts in clothing remained below year-ago levels and added to the annual
goods inflation. These developments altogether led to an increase in the annual
inflation of Special CPI aggregates.
4. The annual rate of increase in the prices of several services sub-items has
been displaying a limited slowdown, yet there has been no significant
improvement in the overall pricing behavior. Howeve r, the slowdown in domestic
demand is expected to have lagged effects on services prices.
5. In addition, a notable base effect stemming from la st year’s market turbulence
and the adverse supply shocks such as the hikes in energy and unprocessed
food prices is expected to ease annual inflation in the coming months.
Accordingly, the disinflation trend is expected to become discernible starting from
the second quarter of 2007.
Factors Affecting Inflation
6. The Monetary Policy Committee (The Committee) ide ntifies the recent data on
economic activity as broadly consistent with the outlook pr esented in the January
Inflation Report:
7. The slowdown in private consumption demand continues. The sustained
decline in automobile and white goods sales in the first quarter signifies that the
slowdown in demand for durable goods continues to curb p rivate consumption.
The data on consumer credits, another indicator of consump tion expenditures,
also suggest a similar outlook. Motor vehicle loans continu e to decrease, while
other sub-items of consumer credits do not reveal a notable increase compared to
the second half of 2006. These developments coupled with the high base of the
first half of 2006 reveal that annual growth in priv ate consumption expenditures
will not display a significant change in the first half of 2007.
8. Foreign demand remains relatively strong. The nega tive impact of the
slowdown in domestic demand on economic growth is largely compensated by
the robust foreign demand. In the first two months of 2007 exports increased
more than imports in real terms. Leading indicators on March and April figures
suggest that the strong export performance continues.
9. Investment expenditures did not change notably over the last quarter of 2006.
In January and February, seasonally adjusted capital goo ds imports rose over the
fourth quarter of 2006, whereas commercial vehicle sales dropped, driven by light
commercial vehicles. Manufacturing of electrical machinery and electronics
maintains its quarter-ago levels. On the other hand, d ata on construction permits
suggest that the construction sector continues to grow at a rapid pace.
10. Although In January and February the industrial p roduction index displayed
high annual growth rates, this development mainly owe s to the base effect.
Seasonally adjusted data do not refer to any accelerati on in industrial production.
The ongoing favorable export performance supports indu strial production, but the
slowdown in domestic demand constrains it. The fact that e xports remained
robust in March indicates that industrial production main tained its upward trend in
March, albeit at a slower pace than in January and Febr uary. Between April and
June, industrial production may temporarily display low annual growth rates led by
base effects.
11. In sum, strong foreign demand is expected to support growth in the first half of
the year, but the slowdown in domestic demand will cont inue to restrain the
aggregate demand. In this respect, aggregate demand con ditions will support
disinflation.
12. Recent data indicate that employment in services mai ntained a modest growth
rate since July 2006. This trend is in line with the slow down in economic activity.
Moreover, export-led industrial production remained r elatively strong while
industrial employment displayed a slowdown over the la st quarter of 2006,
suggesting that labor productivity continued to rise.
13. The recent surge in crude oil prices is worth noting and the concurrent rise in
other commodity prices increases the risks related to cost-pus h shocks. The
elevated levels of the oil and other commodity prices require close monitoring.
14. In the recent period, end-2007 inflation expectat ions displayed a slight
increase possibly owing to the high inflation outturns i n the first quarter. Yet, the
medium-term inflation expectations have not deteriorated, pointing that the agents
perceived the rise in inflation temporary. However, t he Committee considers the
gap between medium-term inflation expectations and th e targets as a risk to price
setting behavior.
Monetary Policy and Risks
15. Private consumption demand continued to slow down i n the first quarter. This
development suggests that the transmission mechanism of mon etary policy
began to function significantly. Yet, the increased cauti on in spending behavior of
economic agents, due to heightened risk perceptions, added to the slowdown in
private consumer demand.
16. Recently, increasing domestic market liquidity coupled with improved external
borrowing conditions has eased credit supply conditions. Th e declining need to
keep high rollover ratios in Treasury’s debt servicing, a nd CBT’s FX buying
auctions contribute to the rise in the market liquidity. Another factor to help
enhance banks’ borrowing facilities is the favorable course of TRY-denominated
bonds issued by foreign institutions. In addition, non-r esidents continue to raise
their holdings in Turkey. A joint evaluation of all t hese developments reveals that
banks’ loanable funds are on a rise.
17. Despite the improvement in credit supply conditions, the high level of bank
loan rates, backed by CBT’s cautious stance, continues to restrain credit demand.
Although the interest rates on loans have recently fall en, they still remain very
high compared to the first quarter of 2006. Therefore , unless interest rates fall
down to lower levels, the growth rate in consumer credi ts will remain contained in
the short term.
18. The Committee reviewed the inflation projections to appear in the April
Inflation Report and concluded that there had been som e developments that
would necessitate an update in the inflation outlook pr esented in January Inflation
Report. These developments can be listed as follows:
19. Firstly, considering the revisions in the 2006 GDP f igures, the lagged
contribution of demand conditions to disinflation is now assumed to be slightly
less than the level set out in the January Inflation Re port. Secondly, the
Committee observed that unprocessed food prices still lack t he expected
correction and that tobacco products suffered tax-driven p rice hike. Furthermore,
the decrease in annual services inflation is deemed to be less-than-expected,
although some sub-items displayed improvements. Lastly, o il-price assumption is
revised upward with regard to the surges in oil prices. Consequently, inflation
forecasts are revised up.
20. The above-summarized updates indicate that further caution might be required
compared to the January Inflation Report of 2007, to make sure that the medium-
term outlook is consistent with the targets. Therefore, t he Committee decided to
enhance the cautious policy stance, as stated in April Infl ation Report, against the
risks such as the gap between inflation expectations and ta rgets, the backward
looking pricing behavior, increase in oil prices, prevail ing uncertainties, and the
stickiness related to services price inflation.
21. The potential impacts of the progress in the structur al reform agenda and the
developments in incomes policy as well as public sector non-interest expenditures
on inflation and inflation expectations are carefully evaluated. Within this
framework, the Committee assessed that meeting the mediu m term inflation
targets requires the maintenance of the tight policy stance.
22. A joint evaluation of the current policy stance and other factors affecting
inflation suggests that the disinflation trend will beco me more discernible starting
from the second quarter of the year. However, risks remain to inflation outlook:
23. The monetary tightening since June 2006 is affecting the domestic demand as
expected. The lagged effects on inflation are yet to b e seen. Recent data is
broadly consistent with the main outlook presented througout the Inflation Reports
since July 2006. The impact of monetary tightening in t he second half of 2006 on
the demand is visible especially through the slowdown in the expenditures of
durable goods and machinery-equipment. Robust performa nce of exports has
been offsetting the contractionary impact of the slowdow n in private domestic
demand and contributing positively to the economic grow th rate. Nevertheless,
uncertainties over the monetary transmission mechanism pre vail to be a risk for
medium-term inflation outlook. While the recent hikes in public expenditures seem
to further blur the outlook, the proposed cut-down in certain non-interest public
expenditure items have somewhat relieved these concerns. In sum, a lower-than-
expected impact of slowdown in domestic demand on inflat ion still remains as a
risk factor. Should such a risk materalize, the CBT may fu rther tighten the policy
24. Another risk related to the medium-term inflation outlook is the stickiness in
inflation expectations and backward looking price setting which would lead to a
higher-than-expected inertia in the disinflation proce ss. The improvement in
inflation expectations came to a halt in the last three months. Although the
expectations should come down gradually as the headline inflation eases, the
sticky medium-term inflation expectations remain to be a risk for the inflation
outlook through its possible reflections on the price and wage setting behavior.
The CBT will keep its cautious stance for an extended per iod should such risk
materialize.
25. Possible fluctuations in global markets remain as a ri sk to the inflation outlook.
The prevailing uncertainties on the US economy and on global imbalances still
have the potential to trigger fluctuations in interna tional markets which may have
adverse impact on emerging economies. Moreover, the ele vated levels of the oil
prices do not help to ease the risks related to global fi nancial markets. On the
other hand, the Treasury’s strong cash accounts and the rece nt slowdown in the
deterioration of the current account have the potentia l to mitigate the impact of
possible fluctuations in the financial markets. In what so ever, should a shock lead
to heigthened perception of uncertainty, the CBT will retain the medium-term
perspective and announce the appropriate strategy to br ing inflation back to the
26. Prudent monetary policy is necessary but not sufficien t for achieving long-run
price stability. The role of fiscal policy and structural reforms are also critical in
this process. Developments in structural reforms that would enhance the quality
of fiscal discipline in the medium and long run are close ly monitored both in terms
of macroeconomic stability and price stability. The Euro pean Union accession
process and the sustained implementation of the structural reforms envisaged in
the economic program also remain to be of concern. Conti nued determination in
implementing the decisive steps taken in these areas in re cent years will
strengthen the resilience of the economy against possible changes in the global