TCMB - Summary of the Monetary Policy Committee Meeting (2024-41)
Central bank: tcmb | Type: decision | Date: 2024-07-30

Summary of the Monetary Policy Committee Meeting (2024-41)
No: 2024-41
30 July 2024
Summary of the Monetary Policy Committee Meeting
Meeting Date: 23 July 2024
Global Economy
1.    The limited improvement in the global growth outlook continued in the second quarter of the year, while tightness in labor markets began to ease and the normalization trend seen in the supply-demand balance continued. The global growth index, which is weighted by the export shares of Türkiye’s foreign trade partners, is forecasted to grow by 2.0% in 2024. That is slightly higher than the 1.8% growth recorded in 2023, and global economic activity remains weak. The first quarter growth data for advanced economies is supportive of the moderate recovery in economic activity, while leading indicators suggest that this recovery is mostly driven by the services sector. The US economic growth trend continued to diverge positively from other advanced economies. The cautious pace of interest rate cuts to ensure a permanent decline in inflation and geopolitical risks are seen as prominent risk factors for the course of global economic activity in 2024.
2.    Global inflation continues to decline, and the latest inflation data from the US indicate that price rigidity in the services sector has begun to weaken. While emerging economies (EMEs) continue to cut interest rates in a way to maintain monetary tightness, the central banks of some advanced economies also began to cut rates. Even though the ongoing improvement in the inflation outlook and the recent developments regarding services inflation strengthen expectations for rate cuts, central banks of advanced economies are expected to adopt a cautious approach in rate-cuts. Meanwhile, risk appetite and portfolio flows towards EMEs display a volatile course due to global uncertainties.
Monetary and Financial Conditions
3.    Excess liquidity in the market due to residents' and non-residents' preference for Turkish lira assets was sterilized in May through notable increases in the reserve requirement ratios for FX-protected deposit accounts, and deposit and participation fund accounts, thus restraining the decline in interest rates on deposits. Turkish lira deposit rates have declined by 20 basis points since the week ending 28 June and stood at 56.16% as of 12 July. In the same period, Turkish lira commercial loan rates decreased by 31 basis points to 60.76%. On the retail loans side, general-purpose loan rates (excluding Overdraft Accounts) increased by 334 basis points to 77.90%, while housing loan rates remained flat at 44.24%. Vehicle loan interest rates, largely shaped by the ongoing sales campaigns, rose to 54.07% as of 12 July.
4.    The effects of monetary tightening on credit conditions and domestic demand are closely monitored. Based on loan growth and its composition, additional measures were taken for FX loans to support the macro financial stability and the monetary transmission mechanism. The regulation for Turkish lira loans was kept constant. Accordingly, the monthly growth limit for FX loans was lowered from 2% to 1.5%, while the monthly growth limit for Turkish lira loans was kept unchanged at 2%. Moreover, the scope of the exemption for investment loans was expanded, and it was decided to exempt investment loans extended in the scope of the funding provided by international development finance institutions from the growth limits for Turkish lira and foreign currency loans. On the back of monetary and quantitative tightening measures, the slowdown in Turkish lira loan growth, which had been observed for some time, continued, while the decline in FX loan growth deepened. Accordingly, the average four-week growth rate of retail loans has decreased since the week ending 21 June from 2.91% to 1.68% as of 12 July, that is calculated from the week of the last MPC meeting. Mainly, the fall in the corresponding growth rate of personal credit card balances contributed to this decline. In the same period, Turkish lira-denominated commercial loans remained on a mild growth path, at an average four-week growth rate of 1.46%. In this period, the average four-week growth rate of FX commercial loans adjusted for exchange rates declined from 4.13% to 1.61% due to the restrictions introduced.
5.    To support the monetary transmission mechanism, the CBRT has taken policy measures to accelerate the unwinding process of FX-Protected Deposit Accounts. Accordingly, as of 22 July, the minimum interest rate for new and renewed FX-Protected Deposit Accounts, was reduced from 80% to 70% of the policy rate and extra returns provided by banks were revoked. Additionally, the scope of YUVAM accounts was narrowed to cover only foreign currency transferred from abroad, the extra returns paid to these accounts by the CBRT were reduced and bank commissions were terminated.
Demand and Production
7.    Recent indicators confirm that domestic demand, albeit still at inflationary levels, continues to slow down. In May, the retail sales volume index fell on both monthly and quarterly basis. During the same period, the trade sales volume index posted a sharper decline. Trade of motor vehicles and wholesale trade, the other two main components of the index along with retail trade, also decreased. Services production index, which had recorded a moderate increase in the first quarter, points to a slight fall on a quarterly basis as of May. In the second quarter, survey data for manufacturing firms indicate a quarterly decline in domestic market orders. Information on consumption expenditures from interviews with firms also pointed to a slowdown in domestic demand. On the other hand, two religious holidays and the associated bridge days due to administrative leaves in the second quarter obscured a clear picture regarding the extent of the slowdown in demand. In the second quarter, card spending continued to increase on a quarterly basis, albeit at a slower pace. Despite posting a limited monthly decline, card spending in the first week of July implies an almost flat course in quarterly terms. Meanwhile, seasonally adjusted imports of consumption goods fell in June, but still hovered above the average of the previous year. Accordingly, an overall analysis of consumption indicators along with the more recent data indicate that demand may not be slowing down to the extent envisaged in the Inflation Report.
8.    In May, the industrial production index increased by 1.7% month-on-month when adjusted for seasonal and calendar effects, but decreased slightly year-on-year when adjusted for calendar effects. On a quarterly basis, industrial production fell by 3.4%. The bridge days associated with the administrative extension of the Eid al-Fitr holiday contributed to the decline of production in April, while the compensatory increase seen in May remained limited. When the typically highly-volatile sectors are excluded, the decline in industrial production in the second quarter is assessed to be less pronounced than the overall index suggests. Leading indicators point to a slight decline in the manufacturing industry capacity utilization rate in July.
9.    As of May, seasonally adjusted employment rose by 0.9% on a quarterly basis and stood at 32.8 million people. In this period, the labor force participation rate went up by 0.3 percentage points, while the unemployment rate came down by 0.3 percentage points to 8.4%. Against this background, main labor force indicators suggest that the labor market remained strong in the second quarter. Survey indicators, on the other hand, indicate a decline in manufacturing firms' future employment expectations.
10.    In May, the current account deficit stood at USD 1.2 billion on a monthly basis and decreased by USD 6.5 billion to USD 25.2 billion in annualized terms. The decline was mostly driven by the fall in the foreign trade deficit excluding gold and energy. On the other hand, the improvement in the energy trade deficit was limited, and the gold trade deficit narrowed compared to the previous month. During this period, the annualized services balance surplus recorded a month-on-month increase.
11.    In June, provisional foreign trade data pointed to a decrease in exports and an increase in imports, in seasonally adjusted terms. Accordingly, on an annualized basis, the current account balance is projected to slightly deteriorate in June, while the improvement in the current account balance is expected to resume in the following summer period when travel revenues are high. Gold imports approached their historical averages in June, dropping to around USD 21 billion in annualized terms. Having decreased both in May and June, the consumption goods imports remain elevated in seasonally adjusted terms. When the provisional foreign trade data for June is considered along with the high frequency data for July, the three-month average trends imply a decline in both exports and imports, with a milder fall in exports. The trend in imports of consumption goods is closely monitored, in tandem with a number of other indicators, to assess the impact of the monetary tightening on domestic demand.
12.    Regarding the financing of the current account deficit, the banking sector’s annualized long-term debt rollover ratio stood at 128% in May. In the non-bank corporate sector, this ratio was around 100%. Accordingly, external financing opportunities appear to have improved somewhat over the previous month.
Inflation Developments and Expectations
13.    Consumer prices rose by 1.64% in June, and annual inflation fell by 3.85 percentage points to 71.60%. Annual changes in the core indicators B and C declined to 70.4% and 71.4%, respectively. In this period, the contribution to inflation of all groups dropped, led by core goods. Adjusted for seasonal effects, monthly consumer inflation decelerated significantly.
14.    In June, monthly price increases in the services group followed a relatively high course, albeit with some deceleration compared to the previous month. In this group, price increases weakened in rents and restaurants-hotels, yet strengthened in transport and communication services. In seasonally adjusted terms, the price increase in core goods remained limited, which was driven by the durable goods subgroup (excluding gold), whose prices fell for the first time since August 2021 due to the mild course of the exchange rate and domestic demand developments. Automobile prices dropped in this period, due also to destocking campaigns in advance of the general safety regulation (GSR 2) for vehicles that was put into effect on 7 July. Meanwhile, the monthly price increase in the food group stood close that in the previous month. In the unprocessed food subgroup, fresh fruits and vegetables recorded surging prices, while the ongoing price hikes in red meat were replaced by a decline, and similarly, prices of chicken meat decreased in this period.  In the processed food subgroup, the bread and cereals item stood out amid the hike in bread prices. Despite falling prices in fuel and bottled gas, energy prices went up in June due to the uptick in municipal water prices.
15.    The underlying trend of monthly inflation registered a notable decline in June. The seasonally adjusted monthly rates of increase in the B and C indices registered a notable slowdown to 2.2% and 1.8%, respectively, compared to the previous month. The seasonally adjusted three-month average increases in the B and C indices were measured at 2.7% and 2.6%, respectively, and receded further. In this period, the deceleration spread across the groups making up the B index, and became more apparent in the core goods group. Similarly, the Median, SATRIM, the diffusion index and other underlying trend indicators also posted a month-on-month slowdown.
16.    In addition to the high level of and the stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflationary pressures alive.
17.    The prevalent price setting behavior in the services sector leads to significant inertia and causes the impact of shocks on inflation to extend over a long time. In June, annual inflation was recorded at 50.6% in core goods, and it was around 45 percentage points higher in services at 95.3%. Moreover, the diffusion index for the services sector indicated that increases continued to spread across the sector. In this regard, based on the recent realizations of consumer inflation, there is a risk that inflation will remain high in certain services items for an extended period, with rents in the lead. In June, prices were noticeable in communication services as well as the transport services driven by the Eid al-Adha. In this period, although having slowed down compared to previous months, increase in rents remained high.
18.    Leading indicators tracked through micro data from the Retail Payment System (RPS) imply that monthly rent inflation will rise due also to the higher rate of renewed contracts in July. On the other hand, both the rate of rent increases in new and renewed contracts and rental rates monitored through residential property valuation reports are below the current annual level in the rent item in the consumer price index (CPI). This implies that annual rent inflation in the CPI will lose pace in the period ahead. However, the high inertia in this item is considered to cause rent inflation to remain high and continue to shape the course of consumer inflation in the disinflation period, though at a declining rate.
19.    Transport services recorded a high monthly price increase in June also due to the Eid al-Adha. Communication services posted a stronger month-on-month price hike due to mobile phone and internet fees as well as postal services. Moreover, education was another services item that stood out due to revisions in private school fees. Having a high tendency for backward indexation and being affected by wage developments, the effect of private school fees on consumer inflation may lose strength gradually in the summer depending on the announcement dates. On the other hand, it should be noted that education services inflation will be affected by price adjustments stemming from private university tuitions in September.
20.    Domestic producer prices rose by 1.38% in June, and annual inflation dropped by 7.59 percentage points to 50.09% also due to the low base effect. According to the Main Industrial Groupings (MIGs), energy prices stood out with an increase of 2.22%, while monthly price increases in the rest of the groups remained moderate, with intermediate goods in the lead.
21.    Having started in late April, the fall in international commodity prices continued in June. Across subgroups, global energy prices remained almost unchanged, while non-energy commodity prices declined. As of the first three weeks of July, commodity prices diverged across subgroups, yet remained flat in sum. Global energy prices increased, while non-energy commodity prices continued to fall in this period. It was noticeable that Brent crude oil prices, which averaged USD 82.6 in June, climbed to USD 87 approximately in the first three weeks of July.
22.    The Global Supply Chain Pressure Index hovered close to its historical average in June. Global freight indices have recently displayed a diverging outlook. Container indices for the globe and China posted an increase after April, while dry cargo transport indices have been on a relatively mild track. The slightly extended lead times of domestic suppliers in May tended to normalize in June. Exchange rate-driven pressures eased significantly due to the ongoing mild course of the basket exchange rate. In June, the manufacturing industry PMI data decelerated both in input and final product price indices, indicating alleviated inflationary pressures.
23.    According to the results of the Survey of Market Participants in July, inflation expectations have continued to decline across all horizons. The 12-month-ahead inflation expectation was revised down by 1.8 percentage points from 31.8% to 30.0%, while the 24-month-ahead inflation expectation was revised down by 1.0 percentage point from 20.3% to 19.3%. Inflation expectations for the current year-end and the end of the next year also edged down by 0.5 and 0.1 percentage points to 43.0% and 25.4%, respectively. Meanwhile, the five-year-ahead inflation expectation was measured at 11.5%. Although inflation expectations have declined across all horizons, the current levels continue to pose an upside risk to the inflation outlook. According to the expectations of the real sector, the 12-month-ahead inflation expectations of firms declined from 56.2% in June to 55.0% in July, showing a limited improvement. On the other hand, in the same period, the 12-month-ahead inflation expectations of households appear to have increased slightly from 71.49% to 71.98%. The Committee closely monitors the alignment of inflation expectations and pricing behavior with projections.
24.    Leading indicators suggest that monthly inflation will rise temporarily in July due to adjustments in administered prices and taxes as well as supply-side factors in unprocessed food prices, which are relatively beyond the control of monetary policy. However, the rise in the underlying inflation is expected to be relatively limited. Energy prices are envisaged to rise significantly in July due to the increase in residential electricity tariffs, the special consumption tax (SCT) revision in fuel and bottled gas prices, and the rise in municipal water prices. Increased electricity prices for businesses are expected to have a negative impact on services prices through the cost channel in July and the upcoming months. The prices of transport services are on an upward track due to rising fuel prices. The prices in the alcoholic beverages and tobacco group increased following the automatic hike in taxes, while producer-driven price increases in alcoholic beverages were also recorded. The course of alcoholic and non-alcoholic beverage prices also adversely affects the restaurants-hotels group through the beverage services channel. Moreover, the partial reflection of the tax-induced effect in the final prices of tobacco products is expected to carry some of the need for an increase over the following month. In the food group, prices of fresh fruits and vegetables increased significantly in July due to temperatures above seasonal norms, while prices of food excluding fresh fruits and vegetables followed a milder course. Leading indicators suggest that the recent mild course of exchange rates and domestic demand developments have resulted in moderate price increases in core goods when compared to other groups. In sum, leading indicators suggest that energy, unprocessed food, alcohol-tobacco groups were the main drivers of monthly consumer inflation in July, while core indicators excluding these groups saw a relatively limited rise.
Monetary Policy
25.    Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks.
26.    The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Consequently, the disinflation process will gain strength.
27.    In case of unanticipated developments in credit and deposit markets, monetary transmission mechanism will continue to be supported via additional macroprudential measures. Liquidity conditions are assessed with respect to prospective developments and closely monitored. Sterilization will be implemented effectively by also enriching the toolset whenever needed. In this context, in addition to the existing sterilization tools, swap tenders of gold and foreign currency against Turkish lira were announced as a facility to sterilize Turkish lira in exchange for gold and foreign currency.
28.    Taking into account the lagged effects of monetary tightening, the Committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the five percent inflation target in the medium term.
29.    Indicators of inflation and underlying trend of inflation will be closely monitored, and the Committee will decisively use all the tools at its disposal in line with its main objective of price stability.
30.    The Committee will make its decisions in a predictable, data-driven, and transparent framework.
Summary of the Monetary Policy Committee Meeting (2024-41)