SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Central bank: tcmb | Type: decision | Date: 2006-03-07

Number: 2006- 10 7 March 2006
SUMMARY OF THE MONETARY POLICY COMMITTEE DISCUSSIONS
Meeting Date: 23 February 2006
Inflation Developments
Price increments in tobacco prices, a rise in the transportation a nd housing group
indices due to the developments in energy prices and price increases in the food group due to
seasonal effects were the factors that had an adverse effect on inflation in January.
Meanwhile, the seasonal decline in clothing prices continued. As a res ult, the CPI
developments being in line with expectations, CPI increased by 0.75 perce ntage points
compared to the previous month. Since the rise in question is higher compar ed to January
2005, annual inflation increased to reach 7.93 compared to the previous month. As t his had
already been foreseen by the Central Bank, it was asserted that January inflation figures did
not necessitate a significant change in the stance towards the m edium-term perspective of
monetary policy.
As the VAT cuts on food, health and education sectors made in early 2005 ha d curbed
price increases, price increments in the mentioned groups might be hi gher in February
compared to the same period last year. In other words, a slight incr ease in inflation in
February would not be a surprise.
In January, the outlook of the special CPI aggregates has been positi ve. Even if an
upward trend was observed in the special CPI aggregates in the pre vious month, generally a
downward trend has prevailed in the last eight months and this points to t he fact that the
downward trend in inflation continues. Hence, inflation expectations continued to improve in
the first two months of the year as well. By the second half of F ebruary 2006, the expected
inflation over the next 12 months is 5.45 percent, which is very close to t he path that is
consistent with the medium-term target.
Producer prices maintained the favorable course. Manufacturing industry prices, when
calculated by excluding petroleum and tobacco products, inched up by a mere 0.21 percent in
January and this development is perceived as being positive.
Services prices continue to be a risk factor with respect to att aining the inflation target
for 2006. Moreover, as the share of services groups in the consumer price index has been
increased while updating the consumer price index for 2006, the mentioned ri sks have further
increased. It is observed that the short of supply in the housing sector in the last few years
exerts an extra seasonal pressure on inflation through items rela ted to housing prices. The
rapid rises in the prices of the sub-groups susceptible to housing price s (rents, restaurants-
hotels, consumer durables) observed recently verify this idea. Meanwhil e, even if the rate of
increase in rents, which decreased to 1.31 percent in January 2006 from 1.90 pe rcent in
January 2005, can be accepted as a favorable development, it is yet too e arly to suggest that
this downward movement will become a trend.
Short-term forecasts made in the light of these evaluations indica te that annual
inflation will slightly increase in the first quarter of 2006, but s tart declining again from the
second quarter onwards. What is important for monetary policy is the consistency between the
medium-term inflation trend and the targets. Therefore, evaluating e lements such as supply
and demand developments, productivity and costs is very important.
Factors Affecting Inflation
The sales figures pertaining to the last quarter of 2005 and development s in
consumption indices and consumer tendency surveys contain signals that consum ption
demand, especially the demand for consumer durables, is stable. Although a slow-down was
observed in demand and production indicators in January, this slow-down is conside red to
stem from the decline in the number of working days caused by the long religious holiday.
Nevertheless, quarterly trends of the indicators in the Business Te ndency Survey, which
include production, domestic market sales and orders and volume of current w ork, are
observed to maintain their favorable course. Furthermore, according to the Manufacturing
Industry Tendency Survey data, proportion of the firms, which cited the lack of demand in the
domestic market as one of the reasons that impede their full capacity, continued to decline.
The rapid growth trend of investments continued in the last period. Accordi ng to
seasonally adjusted data, increases in the production of machinery-equipm ent, office
machinery and electrical machinery and appliances sectors continued in the last quarter of
2005. In the same period, the data pertaining to domestic sales of comme rcial vehicles and
imports of capital goods also point to the revival in investments. Meanw hile, the distortion
observed in the data pertaining to economic activity in January, was r eflected on the
investment tendency for the next 12-month data in the Business Tendency S urvey. However,
as the said indicator is still at a high level compared to the a chieved level, the investment
tendency is deemed to maintain a strong course. As a result of the macroeconomic stability
that increased in recent years, long-term interest rates conti nued to decline gradually and the
New Turkish lira retained its strong position. These two factors unde rpin the revival in
investments. These developments ensure the continuation of the increases in partial
productivity, as well. There is no doubt that what is important for the sustainability of the
increases in productivity is the increase in total factor productivity. In this respect, the
continuation of structural regulations such as the enhancement of competi tiveness and
amelioration of the investment environment are of great importance.
Industrial production maintains its stable trend. The Real Sector Conf idence Index
maintained its high level despite its downward movement in January. Meanwhile, the capacity
utilization rates being at relatively lower levels compared to the previous year, limits the
effects of the revival in the economy on prices. Considering that the increase in production
capacity continued throughout 2005, a similar outlook is also foreseen in the upcoming
Another significant point related to the developments in January is the annual decline
in exports. However, when excluded from the calendar effects such as seasonality and
working days, it is observed that exports increased annually. Furthermor e, the continuation of
the positive course of the expectations that are mentioned in the Busi ness Tendency Survey
for the volume of the goods to be sold to foreign markets and the amount of new orders
coming from the export market in the upcoming quarter, and the leading indicators announced
for February, indicate that the increase in foreign demand will cont inue, albeit with a slow-
down compared to previous years.
Although consumer loans maintain their high levels, their annual rates of increase,
excluding housing credits, displayed a stable trend in the last period. This is considered as an
indicator of the stability of the increase in domestic demand. There is no doubt that the
increases in housing credits, which stemmed from structural facto rs, might continue in the
upcoming years. Moreover, the rapid declines observed in credit interest rates in the past year,
are expected to continue to underpin both consumer and corporate credits. The results of the
Banks Loans Tendency Survey for the last quarter of 2005 indicate that t he increase in the
demand for consumer credits and especially for housing credits will continue. In this context,
rapid credit expansion is considered as a development that should be monitor ed closely in
terms of both price and financial stability.
To sum up, the evaluations regarding supply and demand conditions, point to the fa ct
that the stagnation observed in January stemmed from the seasonal fa ctors and that the
increase in total demand maintains its stable course. The continuance of productivity increases
in line with the investment-based growth restricts cost pressures. Meanwhile, it is anticipated
that the support of supply and demand conditions to the downward trend in inflati on will be
limited in the upcoming period compared to previous years.
Developments in crude oil prices stood as the leading factor in term s of production
costs. In recent months, continuation of the unforeseen volatility in oil pr ices confirms that oil
prices remain as a significant risk factor in terms of the a chievability of the inflation target for
2006. Moreover, the fact that the International Metal Prices Index registered high increases on
an annual basis constitutes another risk factor. Despite of all thes e unfavorable developments
in international raw material prices, the strong position of the New Turkish lira helped restrain
the increases in input costs in the recent period.
The risks for the inflation outlook arising from likely fluctuations i n international
liquidity conditions and global risk appetite are always present. His torically low long-term
interest rates in developed countries in recent years led to the f low of international funds
particularly to developing countries that made significant progress towards stability, such as
Turkey. In case of a reversal in these trends, fluctuations may occ ur in the financial markets.
Although recently the stance of both the European Central Bank and the Fe deral Reserve
provide some signals for the continuation of this trend for quite a while , it is a fact that global
trends may change very quickly. The financing structure of the current account deficit has
tended to grow stronger recently, which means that the resilience to fluctuations in
international liquidity conditions started to increase. Nevertheless, sustaining the structural
adjustments in a determined manner and the continuance of implementations that would
encourage direct capital inflow are still critical in terms of medium and long-term perspective.
Monetary Policy
In the light of the developments summarized above, the Monetary Policy Committee
has concluded that, although there seem to be favorable developments in some cost factors,
the data announced recently on inflation and economic activity do not significantly change the
outlook elaborated in the Inflation Report. The forecasts indicate that the disinflation process,
coming to a halt in the first quarter of 2006, will resume in the se cond quarter. Despite this
downward trend, in light of current data, end-year inflation is more li kely to be above the
point target of 5 percent rather than below. The cautious approach of monet ary policy should
be maintained due to the continuation of price rigidities in the servic e sector, the reduction of
the support of supply and demand conditions to disinflation, and the continued risks related to
the costs of raw materials. On the other hand, the decrease in the risk premium has been noted
and is being monitored with a view to assessing whether it is going to be permanent or
temporary.
As a result of these evaluations, Monetary Policy Committee deci ded to keep short-
term interest rates (policy rates) applied at the CBRT Interbank Money Market and the
Istanbul Stock Exchange Repo-Reverse Repo Market unchanged at the meet ing dated 23
February 2006.
In the light of currently available information, policy rates are less likely to increase,
rather than remain stable or decrease in the medium-term. In the near-term, however, the
likelihood of policy rates to remain stable seems to have been less ened somewhat since the
last meeting. This policy perspective will ensure that inflation is in line with the target path
around mid-2007. On the other hand, it should be emphasized that any new data and
information associated with the inflation outlook will compel the Moneta ry Policy Committee
to potentially revise its stance about the future.