SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-12-13

27 December 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting date: December 13, 2007
Inflation Developments
1. Consumer prices rose by 1.95 percent in November, brin ging the annual
inflation to 8.40 percent. Administered prices accounted for about 1
percentage point of the month-on-month increase in hea dline inflation. The
upward trend in the prices of processed food and catering services group
suggest that the drought continued to be effective on fo od inflation in
November as well.
2. Energy prices edged up sharply in November by 6.78 p ercent, raising the
annual inflation in this group to 11.02 percent. This was mainly attributable to
the rise in the prices of fuel oil and LP gas, driven by hikes in the Special
Consumption Tax, as well as to the new municipal water t ariff in İstanbul.
Aside from adjustments in administered prices, the recent increase in
international oil prices was also instrumental in the ri se of energy prices. The
planned hikes in electricity and natural gas prices in the upcoming period,
together with the future course of oil prices, pose a sig nificant risk to energy
3. Despite the decline in the prices of clothing and foo twear, the year-on-year
inflation in goods excluding energy and unprocessed food posted an increase
in November due to significant price hikes in processed food , tobacco
products and gold. The prices of consumer durables, on the other hand,
maintained its downward trend in November. Following the tax hikes on
tobacco products, the prices of alcoholic beverages and tobacco group
increased by 6.51 percent month-on-month, bringing the annual inflation rate
for this group to 17.21 percent. In other words, nearl y 0.85 percentage points
of the annual CPI inflation stems from the tobacco prices.
4. Annual services inflation slightly increased in November due to the rise in the
prices of recreational and cultural services, and restaurant s and hotels group.
In line with sustained increases in food prices, catering se rvices inflation has
been accelerating recently. The Monetary Policy Committ ee noted the
continued slowdown in rents and transportation services inf lation and
assessed that recent developments in services inflation were f avorable except
for food price-driven increase in catering services inflation.
5. Adverse developments in food prices due to drought and global factors have
put an upward pressure on core inflation indicators via h igher prices of
processed food and catering services. Yet, the Committee asse ssed that
readings on inflation do not present an unfavorable ou tlook when food-related
items and administered prices are excluded. Therefore, in flation is expected to
decelerate further despite the upside risks related to food and energy prices.
Factors Affecting Inflation
7. Gross Domestic Product (GDP) increased by 1.5 percent in the third quarter of
2007 compared with the same period of last year. Season ally adjusted figures,
on the other hand, pointed to a 0.6 percent decline o ver the second quarter.
Domestic demand gave a strong boost to GDP, while the pu blic sector
contributed to growth at a slower rate; the contributi on of net foreign demand,
however, was noticeably negative. While the lagged effe cts of the monetary
tightening have continued, albeit at a weaker rate, te mporary supply shocks in
the agricultural sector have accentuated the slowdown in economic activity.
8. The contribution of private consumption demand to gr owth improved
significantly over the third quarter, consistent with the leading indicators
reported in previous reports. In seasonally adjusted term s, private
consumption demand, which has grown modestly since mid-200 6, increased
by 2.3 percent in this period compared to the previous q uarter, mainly on the
back of spending on durables and semi- or non-durables.
9. Despite the rebound in private consumption demand, t he pace of public
consumption showed little change from previous quarters, w hereas restrictive
measures on the fiscal side has shown its impact on public in vestments. The
recovery in domestic demand was mainly driven by private co nsumption,
whereas private investments lost momentum on a quarterly basis.
10. Leading indicators for the fourth quarter points t o a moderate recovery in
economic activity. Industrial production grew by 7.9 perce nt year-on-year in
October and was up markedly from September in seasonally adjusted terms.
Indicators for private consumption and investment demand a lso suggest a
similar outlook. According to the seasonally adjusted data , following a
downbeat reading in September, domestic sales of automo biles grew rapidly
in the October-November period compared to the third q uarter. The CNBC-e
consumption index also exceeded its third-quarter average. Moreover, imports
of consumer goods jumped in October compared to the same month last year.
Seasonally adjusted domestic sales of white goods also rebo unded in October
but remained below the third-quarter average.
11. Consumer loans also continue to increase at moderate rates. The Committee
assessed that, in addition to the lagged effects of monet ary tightening,
ongoing problems in global credit markets were restrictive on the growth of
consumer loans in the fourth quarter of 2007.
12. The Committee underlined the essence of investments f or the sustained
productivity gains. Despite a slowdown in machinery-equip ment production,
imports of machinery-equipment gained speed in October over September and
also the preceding quarter. In addition, both producti on and imports in the
electrical machinery industry increased significantly on a year-on-year and per
quarter basis. Following a rebound in the third quart er, domestic sales of light
commercial vehicles recorded high growth rates during the October-November
period compared to the previous quarter. Imports of capi tal goods grew
sharply by 41.3 percent in October on a year-on-year b asis and seasonally
adjusted figures point to a continued acceleration. In su m, leading indicators
except for machinery-equipment production suggest that in vestments picked
up in the fourth quarter on a yearly and quarterly basis.
13. Exports continue to expand owing to productivity gain s and on the back of
strong external demand. Preliminary data indicate that exports recorded a high
growth rate in November in dollar terms. Nevertheless, a ccording to quantity
indices that exclude the price effect, real exports grew at a lower pace than
real imports in the second half of the year. The streng thening demand for
imported goods, particularly automobiles and commercial vehicles and other
capital goods, signal that the contribution of net fore ign demand to growth will
continue to be negative in the last quarter.
14. To sum up, the modest recovery of the private demand continues, while
aggregate demand conditions continue to support the disi nflation process on
the back of slowdown in public expenditures and net external demand.
15. The Committee noted that the recent labor market developments also contain
valuable information on the current state of the econom y. Readings on
seasonally adjusted figures showed that the growth rate of services
employment, particularly in wholesale/retail trade an d in restaurants/hotels,
has been slowing down since mid-2006. This trend became m ore pronounced
in the third quarter of 2007. Accordingly, the decline in non-farm
unemployment rate came to a halt in the past year. Lo oser labor market is
likely to restrain wage inflation in the overall economy.
16. While employment in the industrial sector posted a year-on-year decrease in
the third quarter of 2007, labor productivity has main tained its upward trend.
Current trends in employment and production suggest tha t unit labor costs will
slightly decline in the fourth quarter of 2007 owing to continued rise in
productivity.
Monetary Policy and Risks
17. Drought and energy related supply shocks not only in crease inflation
temporarily but also have short term adverse effects on gr owth. In fact, the
contraction in the agricultural output in 2007 explains much of the recent
dynamics in inflation and output. The Committee under lined that the primary
noted that monetary policy remains restrictive even after the recent rate cuts.
18. The CBT is focused on attaining the medium term inflation target of 4 percent,
in a framework where monetary policy does not react to temporary and
exogenous shocks. The Committee, judging the recent rise in inflation as
temporary, maintained the policy stance presented in th e October Inflation
Report, and assessed that, under a measured and cautious r ate cut cycle, the
risks against attaining the inflation target in the med ium run are balanced. The
timing and extent of further easing will depend on in coming information
regarding global liquidity conditions, external demand , fiscal policy
implementation and other factors affecting the medium term inflation outlook.
Risks to the inflation and monetary policy outlook can be summarized as
19. Ongoing uncertainties in global financial markets ha d an adverse impact on
consumer and investor confidence. It has also tightened cred it conditions,
laying the ground for measured and cautious rate cuts. N onetheless, there are
still difficulties in assessing the overall risk. Uncertaintie s on global risk
appetite and the extent of slowdown in global growth persist, which poses
risks on the outlook for monetary policy.
20. Food prices remain as an important risk factor for in flation. Besides the
drought-related factors, increased demand for bio-fuels drives up world prices
for many farm products such as corn and wheat. Although t here is some
chance of a downward correction in unprocessed food prices, the processed
food prices are likely to follow an elevated course in th e short term. Yet, food
inflation is expected to normalize in the medium term.
21. Although administered prices led to a rise in headl ine inflation recently, the
impact on medium term expectations was rather limited. H owever, potential
second round impacts of the planned hikes in electricity an d natural gas prices
compels the Committee to be cautious.
22. Accordingly, potential effects of rising food and en ergy prices on overall price
setting behavior in the economy will be closely monitored.
23. Finally, it should be emphasized that the support of fiscal policy and structural
reforms are critical for achieving and maintaining price stability. Particularly,
advances in structural reforms that would enhance the qual ity of fiscal
discipline are monitored closely with regard to their i mplications on
macroeconomic and price stability. Sustaining the producti vity gains is
essential for attaining price stability while preserving high growth rates. In this
respect, the European Union accession process and the implem entation of
structural reforms envisaged in the economic program, which will ensure the
sustainability of productivity gains, remain to be critical.