SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2008-08-14

No: 2008 – 22
26 August 2008
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: August 14, 2008
Inflation Developments
1. Consumer prices increased by 0.58 percent in Jul y, pushing annual inflation
up to 12.06 percent due to soaring energy prices an d the base effect from
food prices. Food and energy items have accounted f or 8.17 percentage
points of annual inflation as of July.
2. The Monetary Policy Committee (the Committee) no ted the relative
deceleration in processed food inflation. Bread pri ces, in particular, increased
only slightly in July after having accelerated sign ificantly in the first half of the
year, while vegetable oil prices continued to rise, albeit at a lower rate. The
Committee expects the processed food inflation to e ase in the remainder of
the year. On the unprocessed food prices front, ann ual inflation increased to
3.75 percent due to the low base from a year earlie r. Although drought
conditions continue to put upward pressure on pulse prices, fruit and
vegetable prices are expected to display a relatively more favorable course.
3. Energy prices increased by 5.79 percent in July on the back of the sharp rise
in electricity and solid/liquid fuel prices. Conseq uently, annual energy price
inflation rose to 26.87 percent. Hikes in electrici ty prices contributed by about
0.5 percentage points to monthly inflation in July. In August, the increase in
natural gas prices is expected to add around 0.15 p ercentage points to
inflation; yet, the fall in fuel prices driven by l ower oil prices will limit the rise in
energy price inflation.
4. The annual inflation in prices of goods excludin g energy and food remained
unchanged from a month ago, at 4.20 percent. Season al discounts led to a
higher rate of decline in clothing prices compared to previous years. The
slowdown in both domestic and foreign demand had a dampening effect on
clothing prices. The strengthening of the new Turki sh lira and the moderating
domestic demand put downward pressure on prices of durable goods; yet
white goods remained on the rise.
5. Lagged effects of supply shocks continued to hav e an adverse impact on
services prices. The year-on-year inflation in pric es for transport and catering
services picked up further in response to a sustain ed rise in food and energy
prices, whereas rental rates continued to decelerate.
6. The annual rate of increase in the widely cited core CPI indexes, denoted by H
and I, went slightly up in July on account of lagge d effects from supply shocks
and the base effect. Seasonally adjusted monthly in flation figures, however,
pointed to a slowdown in these indicators. In view of the downtrend in
underlying inflation over the past two months and t he decline in oil prices, the
Committee expects inflation to moderate gradually in the forthcoming period.
Factors Affecting Inflation
7. Recent data indicate that economic activity has continued to slow down. After
having expanded by 6.9 percent year-on-year in the first quarter, industrial
production moderated to an annual growth rate of 3. 1 percent during April-
June 2008. In seasonally adjusted terms, industrial production remained flat
over the first half of the year.
8. Early indicators suggest that domestic demand in the second quarter has been
weaker than the first quarter. Consumer confidence indices stayed at lower
levels than the first quarter, and the growth in re al consumer loans have
further slowed down. The seasonally adjusted consum ption indices, the
production of chemicals, domestic sales of automobi les, and imports of
consumer goods went down during January-June 2008. In contrast, domestic
sales of white goods recovered in the second quarte r, although the production
in the industry remained flat.
9. Domestic uncertainties and the depreciation of t he new Turkish lira against
major currencies had an adverse impact on investmen t demand in the second
quarter. The production of machinery-equipment decl ined further in seasonally
adjusted terms, while imports of capital goods fell for the second quarter in a
row. Moreover, domestic sales of commercial vehicle s suggested that
machinery-equipment investments were slightly down from the first quarter.
10. The annual growth rate in export quantity index was 18.2 percent year-on-year
in the first quarter, but declined to 9.1 percent i n the second quarter.
Seasonally adjusted figures pointed to an ongoing, yet moderating export
growth. Recently, downside risks on global economy have increased,
especially indicators for Euro area pointing to a s lowdown. The Committee
assessed that external demand could be adversely af fected, should this
outlook persist.
11. Regarding demand indicators for the third quart er, consumer confidence
indices rebounded slightly in July, yet still remai ned at low levels. Meanwhile,
real consumer loans continued to grow at a subdued pace. In this context, the
Committee stated that ongoing problems in internati onal credit markets and
the global economy continue to restrain the aggregate demand.
Monetary Policy and Risks
12. Considering the monetary tightening since May, the Committee indicated that
the level of the policy rate was supportive of disi nflation. The decline in longer-
term interest rates owing to easing domestic uncert ainties should support
domestic demand. However, aggregate demand is still expected to remain
contained given relatively tight credit conditions, restrictive monetary policy,
and moderating external demand.
13. The committee indicated that oil prices have fo llowed a significantly lower
course than the levels assumed in the baseline scen ario in the July Inflation
Report and other commodity prices have also display ed a downward course,
improving the near-term inflation outlook. Conseque ntly, inflation is expected
to fall gradually in the forthcoming period.
14. Food prices have been evolving in line with the projections outlined in the July
Inflation Report. It is anticipated that processed food inflation will gradually fall
owing to lower commodity and import prices while un processed food inflation
will maintain its current favorable course. Yet, th e Committee underlined the
need to remain cautious with regard to assumptions on food and oil prices,
given the volatile course of commodity prices.
15. The Committee noted that the rise in inflation expectations was limited
although inflation outturn was significantly higher than the average of market
expectations in June. Inflation expectations should ease gradually as inflation
starts decelerating in the forthcoming period.
16. Despite the expected decline in inflation in th e medium term, uncertainties
exist regarding the degree of inflation persistence . Long-lasting supply shocks
have been delaying disinflation and thus increasing the risk of rising backward
looking schemes in the wage and price setting behav ior. Although the
widening output gap should contain the second round effects of the supply
shocks, the exact pace of disinflation would still depend on the extent new
inflation targets serve as a strong reference for e conomic agents. Having this
in mind, the CBT will continue to focus on enhancin g the credibility of the new
inflation targets.
17. International financial markets remain fragile. Prevailing problems in financial
markets continue to pose downside risks on global e conomic growth.
Persisting uncertainties in the global economy have been causing financial
markets to be sensitive to data announcements. The CBT will not display a
sharp reaction to temporary fluctuations in the fin ancial markets, unless there
is a long lasting deterioration in expectations and a significant worsening in the
general pricing behavior.
18. Inflation and monetary policy outlook outlined above envisages that
government expenditures and incomes policy will evolve in line with the official
projections and that there will be no further incre ases in indirect taxes or
administered price adjustments, except those requir ed by the automatic
pricing mechanisms. Any deviation from this framewo rk may lead to a revision
of the outlook for inflation and monetary policy.
19. In sum, prevailing risks regarding the price se tting behavior and ongoing
global uncertainties require monetary policy to remain cautious and to be more
responsive to incoming data. Future decisions on po licy rates will depend on
developments in global markets, external demand, fi scal policy
implementation, and other factors affecting the medium term inflation outlook.
20. Prudent monetary policy is a necessary but not a sufficient condition for
attaining price stability. The support from fiscal policy and structural reforms
are also critical in this respect. Sound fiscal pol icy has been one of the main
factors in driving inflation down to single digits. The role of fiscal policy will
continue to be critical in the road to price stabil ity. Preserving the resilience of
the economy, especially under current conditions, r equires the continuation of
fiscal discipline and structural reforms. In this r espect, the European Union
accession process and the implementation of structu ral reforms envisaged in
the economic program remain to be of utmost importa nce. In particular,
advances in structural reforms, which would improve the quality of fiscal
discipline and enhance the productivity, are monito red closely by the CBT with
regard to their implications on macroeconomic and price stability.