SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-11-19

No: 2008 – 35
01 December 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: November 19, 2008
Inflation Developments
1. Consumer prices increased by 2.60 percent in October, p ushing annual
inflation up to 11.99 percent, mainly on account of th e temporary rise in
vegetable prices. The plunge in world oil prices helped to ease fuel prices, but
the increase in electricity, natural gas and solid fuel p rices put further upward
pressure on energy price inflation. The contribution of food and energy prices
to annual inflation went up to 7.6 percentage points, while annual services
inflation declined.
2. The sharp increase in unprocessed food prices in October drove food prices
up by 3.91 percent on the back of soaring fresh fruit an d vegetable prices that
were up around 30 percent. Accordingly, the increase in fresh fruit and
vegetable prices accounted for 1.7 percentage points of th e 2.6 percent rise in
monthly CPI. Annual processed food inflation, on the o ther hand, fell by a
cumulative 6.2 percentage points in three months. The do wntrend in
processed food inflation is expected to continue into comin g months on the
back of favorable prices for bread and grains and solid and liquid fats.
3. Although fuel prices dropped by 2.35 percent, energ y price inflation climbed to
30.98 percent year-on-year in October amid rising elect ricity, natural gas and
solid fuel prices. Electricity prices have soared by a cumula tive 56 percent
since the beginning of the year, while solid fuel price s have jumped by 31.5
percent in four months. Price cuts of 15 and 10.3 percent on liquid petroleum
gas and bottled gas, respectively, are expected to curb the impact of the
natural gas price hike of 22.5 percent in early November on CPI inflation. In
view of these developments and the base effect, annual en ergy inflation is
expected to fall in November.
4. Prices of goods excluding energy and food rose by 1 pe rcentage point to 5.17
percent year-on-year in October. In the clothing group , annual inflation
remained low, while in the durables group (excl. gold) inflation went up due to
the base effect and the exchange rate developments. Given the exchange rate
pass-through and the low base from a year ago, the ann ual inflation in durable
goods is expected to rise further in November.
5. Annual inflation in services, which had been on the r ise since March,
moderated in October with the easing supply shocks and the weakening of
domestic demand. Accordingly, annual services inflation was down by 0.5
percentage points to 10.97 percent in October. In fact, inflation in all services
categories declined in October. Recently, seasonally adjust ed core inflation
indicators also point to a slowdown in underlying inflation.
Factors Affecting Inflation
6. The adverse impact of the global financial crisis on th e Turkish economy has
become more visible. Recent information points to a pron ounced slowdown in
domestic economic activity. Industrial production fell by 5 .5 percent in
September from a year earlier. Third quarter industr ial production dropped by
2.1 percent in annual terms and 3.5 percent quarter-on -quarter in seasonally
adjusted terms. This outcome was mainly driven by the decline in the activities
of export-oriented industries.
7. Leading indicators suggest that industrial production will continue to weaken in
the fourth quarter. In October, the capacity utilization in manufacturing industry
fell to 76.7 percent, down by 6.4 percentage points fr om a year ago. Similarly,
the Business Tendency Survey in October showed that new or ders in the
manufacturing industry for the next three months and exp ected production
have declined sharply.
8. After having remained flat in the third quarter, private consumption spending
will fall markedly in the fourth quarter, as suggested by recent indicators.
Domestic sales of automobiles dropped in October while con sumer loans fell
in real terms from a month ago. In addition, expectati ons for domestic sales in
the next three months have fallen remarkably, and consume r confidence
indices displayed a sharp decline on the back of global economic concerns.
9. Leading indicators suggest that the investment spending continued to slow
down in the third quarter. In seasonally adjusted term s, both production and
imports in the machinery-equipment industry and the el ectric machinery and
appliances industry fell in the third quarter. Likewise, domestic sales of heavy
commercial vehicles continued to decline in October. Import s of capital goods,
on the other hand, grew at a modest pace in the third quarter on a seasonally
adjusted basis. Yet, the recent depreciation in domestic cu rrency will likely to
curb the investment demand in the fourth quarter. Mean while, medium term
investment sentiment of the industrial sector continued to weaken, as
suggested by the results of October’s Business Tendency Survey . In view of
these developments, private investment spending on machiner y-equipment is
expected to weaken further in the third and fourth qua rters. Besides, recent
indicators also point to a marked decline in construction a ctivities in the
second half of the year.
10. Due to the sharp global economic downturn, Turkey’s export market share has
fallen markedly. Exports displayed a year-on-year fall by 3.1 percent in
September. Although the increased share of exports to no n-EU and US
countries signals a potential for market expansion, Turkey’ s export
performance in the near term is likely to be weaker comp ared to previous
years. Given the expectations for export orders in the comi ng three months
and rates of capacity utilization in export-oriented in dustries in October, export
volume is expected to fall in the final quarter. Moreove r, the softening in
domestic demand and the depreciation of the YTL will l ead to a marked
slowdown in imports in the fourth quarter. Overall, im ports are expected to
decline at a slightly faster pace than exports, which will lead to a positive
contribution from net exports to GDP growth.
11. In sum, recent readings indicate that the economic act ivity continued to
weaken in the third quarter. Due to tighter credit con ditions and the
deterioration in consumer and investor confidence, domesti c demand will
continue to fall in the fourth quarter. Accordingly, a ggregate demand
conditions will increasingly support disinflation.
Monetary Policy and Risks
12. The meeting focused on the developments since the pub lication of the
October Inflation Report. The Committee stated that o ngoing problems in
international credit markets and the global economy wou ld continue to restrain
both domestic and external demand for an extended period
13. The Committee members expect the pass-through from e xchange rates to
domestic inflation to remain low in the current period compared to the past
episodes. The Inflation Report involved no major revision in the medium term
inflation forecasts, as the impact of the pass-through fro m the exchange rate
depreciation to inflation was expected to be largely offset by the favorable food
and energy prices and the weakening demand. Recently, w eaker-than-
expected economic activity has reinforced the Committee’s view that the pass-
through would remain muted.
14. The Committee has reiterated that the sharp declin e in oil and other
commodity prices would have a favorable impact on disinfla tion. Recently,
import prices have been easing due to ongoing weakness in global economic
activity. Therefore, domestic prices of imported goods are not expected to
display a significant rise, notwithstanding the depreciat ion in the nominal
exchange rate. This should be another factor limiting th e exchange rate pass-
15. In sum, considering the recent data, the Committee has judged that inflation
would display a more rapid fall than envisaged before. The Committee
members have stated that although some pass-through from exchange rates
to certain core inflation measures is unavoidable, this sho uld be seen as a
change in relative prices rather than a rise in underlyi ng inflation. Given that
medium term inflation outlook is mainly driven by suppl y and demand
conditions, inflation should trend downwards in the forthcoming period.
16. The Committee underscored the need to remain cauti ous in monetary policy
decisions to ensure a sustained fall in inflation. On the other hand, the
Committee members have indicated that recently domestic financial conditions
have been tighter than required by the current stance o f monetary policy,
owing mainly to the intensification of global financia l crisis. In this context, it
was stated that a measured rate cut would partially off set the extra tightening
in monetary conditions.
17. Based on these assessments, the Committee has decided to lower the
borrowing rates by 50 basis points. Moreover, the margin between the lending
and borrowing rates was reduced by a further 50 basis po ints in order to
contain the potential volatility in short term interest rates.
18. The Committee has underscored the importance of mai ntaining the smooth
functioning of the financial system and the efficiency of credit markets, and
has thus decided to implement additional measures regard ing the foreign
exchange liquidity. As a lender of last resort, the Cent ral Bank has at its
disposal the tools necessary to manage the Turkish Lira liq uidity directly, and
therefore is able to supply the required liquidity to support the smooth
functioning of financial and credit markets. Foreign excha nge liquidity
conditions, on the other hand, are largely determined by global factors.
Accordingly, considering the existing level of uncertainty in the global
economy, the Committee members have underlined the imp ortance of utilizing
the foreign exchange reserves primarily to support the fo reign exchange
liquidity of the banking system, in line with the plan announced on October the
19. Central Bank will continue to take the necessary measu res to contain the
adverse effects of the global financial turmoil on the d omestic economy,
provided that they do not conflict with the price stability objective. Future policy
decisions will largely depend on the developments in glo bal markets and their
reflections on the domestic economy. It should be emphasiz ed that monetary
policy needs to remain flexible, and sensitive to new data and developments.
20. Central government budgetary outturns were in line with the targets in the first
three quarters of the year. The slowdown in economic act ivity will moderate
tax revenues, and hence create downside risks on budgetary r evenues.
Inflation outlook presented above assumes that the fall i n energy prices will be
fully passed through domestic energy prices. In this context, it is important that
any needed tightening in the fiscal balance would be i mplemented through
expenditure cuts rather than higher excise taxes. The Commi ttee emphasized
that outlook for inflation and monetary policy may be affected by the deviations
from this framework.
21. Prudent monetary policy is necessary but not sufficien t to maintain the
resilience of the economy against the global financial t urmoil. Preserving the
fiscal discipline and strengthening the structural reform agenda would also
help to mitigate the adverse effects of the ongoing shocks on the domestic
economy. In this respect, the European Union accession proce ss and the
implementation of structural reforms envisaged in the eco nomic program
remain to be of utmost importance. In particular, advan ces in structural
reforms, which would improve the quality of fiscal discipl ine and enhance
productivity gains, are monitored closely by the CBT wit h regard to their
implications on macroeconomic and price stability.