SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-06-26

No: 2007- 14
26 June 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 14 June 2007
Inflation Developments
1. Consumer prices rose by 0.50% in May. Annual inflati on fell to 9.23% by 1.5
percentage points, mainly owing to the lagged effects o f monetary tightening, the
partial correction in unprocessed food prices and the base effect.
2. Annual inflation of unprocessed food prices declined t o 11.09%. This
downfall was, as noted by the Monetary Policy Committe e (MPC) last month, due
to warmer weather conditions resulting in the early ma rketing of certain summer
crops. This development mainly drove down the vegetable p rices, whereas fruit
prices continued to rise dramatically. The considerable decline in vegetable prices
in May had a favorable impact on May inflation but br ought along the possibility
that price declines may remain more limited during the summer months. Rising
support prices for grains, possible drops in crop yields of certain products caused
by unusually warm weather conditions and low rainfall, and the new Wholesale
Market Regulation on fresh fruit-vegetable trade are a mong other factors posing
uncertainties over food prices. On the other hand, recent Value Added Tax cuts in
a number of food items may have a slightly favorable ef fect on food prices in
3. The recent downfall in services inflation became quite discernible in May.
Annual services inflation fell by 0.91 percentage points to 10.85% down from
April. Cumulative rise in services prices for the first five months is 3.39%–the
lowest figure since the 2003 based CPI index was introduce d. Especially inflation
in transportation services and restaurants-hotels indicate a notable improvement
compared to the previous years. Prices of most items under services tend to
decelerate owing to the monetary tightening, yet ren ts maintain an elevated
4. Energy prices are much affected by soaring global oil prices. Fuel prices
rose by 8.45% within the last three months. Utility pr ices, on the other hand,
display a benign outlook with quite moderate rises. The Committee, however,
carefully evaluates the possible impact of oil prices on utilities.
5. The Committee predicts that inflation will further slow down in the coming
months. The fading out of the exchange rate pass-throug h effect driven by last
year’s volatility, and the lagged effects of monetary t ightening especially on prices
of services and durable goods are expected to add to the d ecline in annual
inflation. Special CPI aggregates also suggest a similar outlook.
Factors Affecting Inflation
6. The Committee assesses that recent data on economic activi ty is broadly
consistent with the outlook presented in the April Inflation Report.
7. The slowdown in private demand becomes more pronounce d. Available
data suggest that domestic demand continued to moderate in the second quarter.
Housing and personal expenditure loans expanded at a mod est pace in annual
terms, whereas the demand for automobile loans continue d to decline.
Seasonally adjusted white good sales and imports of consum er goods fell in April
and the automobile sales plunged in April and May  indicating an ongoing
retrenchment in consumer demand.
8. Private investment demand for machinery and equipmen t continues to slow
down. While the seasonally adjusted data for the electr ical machinery and
electronics production and capital goods imports in April are higher than the
March figures, the reduced machinery-equipment productio n and the continued
decline in commercial vehicle sales indicate that investment growth remains at a
subdued level. Production and import data on non-metal lic minerals, on the other
hand, signal a modest growth in construction.
9. External demand remains strong. Exports continued to g row more than
imports in real terms in April. The leading indicators reveal a similar pattern for
May and June. These developments suggest that net external demand has
continued to support growth during the first half of 2007.
10. Weakening course in domestic demand led to a slowdown in industrial
production, despite robust external demand. April indust rial production figure was
lower than that of March in seasonally adjusted terms. Also considering the strong
second-quarter figures of the last year, annual growth in industrial production is
expected to decelerate significantly in the second quarter of 2007.
11. Moreover, the moderating growth in services employme nt in the last three
quarters is in line with the slowdown in economic activity.
12. The marked decline in annual inflation in May had a favorable impact on
inflation expectations. Accordingly, short and medium ter m expectations
displayed a slight improvement. However, ongoing perceptions of uncertainty limit
the downward trend in inflation expectations. The impr ovement in medium-term
expectations should continue as the headline inflation kee ps decelerating towards
the 4 per cent target in the upcoming period.
13. In sum, economic developments over the last 12 months a re highly
consistent with the Committee’s predictions. Demand for co nsumption and
investment continue to ease, while strong external demand moderates the
slowdown in overall economic activity. Aggregate demand co nditions increasingly
support disinflation. Against this background, inflation is expected to maintain its
downward course.
Monetary Policy and Risks
14. Parallel to the favorable outlook in medium-term inflation expectations,
interest rates on government securities continue to decline . The fall in interest
rates and the ongoing capital inflows expand the supply of loanable funds and
add to the downward pressure on bank lending rates, as r ecently observed in
housing loan rates. However, considering the cautious stance of monetary policy,
the downward trend in lending rates is expected to be l imited in the short term.
Current levels of the bank lending rates are still high enough to curb expenditures.
Moreover, the rise in risk perceptions and the resulting p recautionary savings
further limit the demand for credit.
15. Monetary indicators also confirm the tight stance of monetary policy and the
slowdown in economic activity. Real volume of currency in ci rculation that
displayed a slowdown since mid-2006 declined in annual t erms in 2007.
Nevertheless, changes in portfolio preferences and innovati ons in the financial
system should also be taken into account while evaluating t he monetary
indicators.
16. The lagged effects of monetary tightening exercised since June 2006 are
quite noticeable. Against this background, inflation is e xpected to maintain its
downward trend. However, there are some remaining risks to the inflation outlook.
17. Inertia in inflation expectations and the backward l ooking pricing behavior
poses a significant risk for the inflation outlook. The el evated course of medium-
term inflation expectations continue to stand as a risk fact or, particularly through
its potential impact on the wage and price setting beha vior. The Committee
perceives the recent decline in services inflation as a favora ble development, but
also notes the risk that services inflation may remain high for a prolonged period.
In order to eliminate the gap between medium-term e xpectations and targets, the
prudent monetary policy needs to be reinforced by sustained fiscal discipline.
18. Although the monetary tightening exercised since June 2006 is affecting
domestic demand as expected, uncertainties over the lagged effects of monetary
policy on inflation still remain. Moreover, rising non- interest government
expenditures has the potential to limit the effectiveness of monetary tightening.
Non-interest budget expenditures of the central governme nt during the first five
months of 2007 surpassed the already generous budgetary projections  a
development that requires close monitoring. In this respe ct, the Committee
carefully evaluates the potential impacts of the developm ents in incomes policy
and public sector non-interest expenditures on inflation and inflation expectations.
19. Recent developments suggest that international liqui dity conditions and
global risk appetite remain to be risks against the infla tion outlook. Currently, the
uncertainty related to main economic indicators in develo ped economies is
perceived as a risk factor. As a matter of fact, recently, st ronger-than-expected
data on the US economic activity has deferred rate cut exp ectations, which in turn
led to fluctuations in the global financial markets. Mor eover, ongoing uncertainties
over the global imbalances stand out as another risk factor that might lead to
abrupt changes in global risk appetite and liquidity conditions.
20. The elevated crude oil prices continue to exert infla tionary pressures and
slow down the pace of disinflation. The Committee judg es that the risks against
energy prices continue to be of concern, and closely monit ors the movements in
crude oil prices with regard to the inflation outlook.
21. To sum up, the Committee decided to keep the policy rates unchanged
against the risks such as the gap between inflation expectat ions and targets, the
backward looking pricing behavior, the remaining uncertai nties  notwithstanding
recent favorable developments  over services price inflation, rising oil prices, and
prevailing uncertainties. The Committee assesses that meeti ng the medium term
inflation targets requires the maintenance of the tight policy stance.
22. Prudent monetary policy is necessary but not sufficien t for achieving price
stability. The role of fiscal policy and structural refor ms are also critical in this
process. Developments in structural reforms that would enha nce the quality of
fiscal discipline are closely monitored in terms of both m acroeconomic and price
stability. The European Union accession process and the imp lementation of the
structural reforms envisaged in the economic program also r emain to be of
concern. Continued determination in implementing the decisive steps taken in
these areas in recent years will strengthen the resilience of the economy against
sudden changes in global sentiment.