SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-01-26

No: 2007-03
26 January 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 16 January 2007
Inflation Developments
1. Inflation continued its recent downward course in Decembe r and declined to
9.65 percent at the end of the year. The main determ inant of consumer price
developments in December is the decline in clothing and f ootwear prices that is
beyond seasonal trends. On the other hand, the annual rate of inflation in
unprocessed food prices increased. Meanwhile, owing to the stable course of
the New Turkish Lira and the slowdown in demand, the d ecline in annual
inflation of durable goods prices continued in December.
2. The Monetary Policy Committee (The Committee) has not ed that uncertainties
regarding unprocessed food prices continue. The decelerati on in the rate of
increase in unprocessed food prices in the last few months ca me to a halt in
December. Persistence of adverse weather conditions coupled with the recent
slump in agricultural production, especially in grain pr oduction, may have an
adverse effect on food prices in the upcoming period. Within this framework, the
Committee considers that food prices continue to be a risk factor for inflation.
3. The Committee has also noted that the decline in oil p rices affected the inflation
outlook favorably. Fuel oil prices decreased by 10.18 per cent in the August-
November period. However, energy prices related to the housing group
increased by 3.19 percent in the last quarter due to th e rapid increases in the
prices of natural gas and solid fuel items and this caused energy inflation to rise
in the last two months of the year. The Committee concl udes that the recent
favorable developments in oil prices are not yet significa nt enough to change
the medium-term inflation outlook, given that there is still a considerable amount
of uncertainty regarding oil prices and lagged effects o f the past cumulative
price increases.
4. The annual rate of increase of the special CPI Aggregat e-H (CPI excluding
energy, unprocessed food products, alcoholic beverages, tobacco products and
gold) declined to 8.89 percent in December. This development can be attributed
to the decline in clothing and footwear prices that is b eyond seasonal trends,
and by the significant decrease in prices of durable good s. Although it is
projected that the monthly rate of changes in the H-in dex may exhibit some
volatility in the upcoming period due to seasonal price movements, the overall
trend is expected to be downwards in the medium term.
5. In 2006, the decline in annual inflation of services was quite limited, due to the
persistent high inflation in the prices of rents and accom modation services. The
possibility of the continuance of this trend in the upcom ing period emerges as a
risk factor for disinflation.
Factors Affecting Inflation
6. The Committee evaluates the recent data as broadly consistent with the outlook
presented in the October Inflation Report.
7. The slowdown in private consumption demand continues. Aft er declining
sharply in the third quarter as a result of depreciatio n of the YTL, increasing
credit interest rates, and lower consumer confidence, the demand for durable
goods increased moderately in the fourth quarter. Alth ough seasonally adjusted
data suggest that automobile sales are stronger than the previous quarter, the
annual growth rate still remains negative. The data fo r the October-November
period indicate a modest increase in white goods sales comp ared to the third
quarter. Business Tendency Survey (BTS) indicators also poi nt to a sluggish
recovery in private consumption in the last quarter of 2006.
8. Although consumer credit, which had stopped its rapid gro wth in the third
quarter in line with the rise in interest rates, has sho wn some tendency to
recover in the fourth quarter, there is still a significa nt slowdown in the rate of
increase in consumer credit in annual terms. While housing loans grow at a low
rate, vehicle loans continue to decline in real terms. Th ese developments are in
line with the slowdown in private consumption demand. T he recent rise in credit
utilization stems mainly from items other than housing and vehicle credits. This
suggests that the coincidence of the New Year and the rel igious feast holidays
has caused consumers to use consumer credits and credit cards int ensively to
meet their increased expenses. In other words, the recent hike in consumer
credit does not point to a rebound; it can be largely explained by seasonal
9. External demand remains relatively strong. The net expor ts made a positive
contribution to overall economic activity in the second hal f of the year.
Sustained increases in labor productivity coupled with the robust economic
activity in the EU, and the euro’s strength against the US dollar support the
export growth. The leading indicators pertaining to Jan uary suggest that
external demand remains strong as of early 2007.
10. Industrial production continued to increase during the l ast quarter of 2006 with
the help of strong external demand. The high annual g rowth rate in industrial
production in November can be explained by the higher n umber of working
days compared to the same month of the previous year, du e to the lunar-
calendar-based religious holiday. However, the seasonally adjusted figures
point to a rise in production as well. The high capacity utilization ratios in
manufacturing industry in December and the benign expect ations of companies
indicate that the rise in industrial production continue d in December as well,
pointing that industrial production has kept growing in the last quarter of 2006.
Moreover, according to the BTS, the companies’ expectation s for production
volume for the next three months in seasonally adjusted t erms also exhibit
positive signals for industrial production.
11. The tightening in financial conditions, the increase in the relative prices of
investment goods and the expectation of deceleration in d omestic demand
caused investment demand to slowdown in the second half of the year. The
leading indicators pertaining to investment demand point to a rise in investment
in the last quarter in seasonally adjusted terms. Sales o f commercial vehicles
increased in the last quarter compared to the third qua rter. Imports of capital
goods, as well as production and imports of machinery-equ ipment, office
equipment, and electrical machinery and appliances in th e October-November
period exceeded those in the third quarter. The statisti cs on the construction
permits and non-metallic minerals sector production that are closely related to
construction investments indicate that robust activity in the construction sector
continues. Moreover, the BTS indicators do not point to a significant
deterioration in investment expenditure tendency over th e next twelve-month
period as of November, thereby supporting this view.
12. To sum up, although economic activity has shown a tendency to recover in the
last quarter of 2006, overall demand conditions continue to support disinflation.
Despite the relatively strong course of external demand a nd increasing public
expenditure, total demand slowed down compared to previ ous periods. The
annual growth rate of output is expected to be low in the last quarter of 2006,
due to the high base in end 2005. It is projected that the economic activity will
continue to recover gradually in the upcoming period.
13. Unit labor costs in the private manufacturing sector conti nued to decline since
productivity increases were higher than the rise in real wages. This, in turn,
continued to support the disinflation process in the thir d quarter of 2006. A
similar trend is expected in the last quarter of the year.
14. Recently available data indicate that the rate of decli ne in agricultural
employment started to slow down significantly, while th e employment in other
sectors continued to rise. However, the fact that the unem ployment rate in non-
agricultural sectors is still as high as 11.9 percent suggests that the rise in
employment has not yet reached a level that would exert pressure on inflation.
On the other hand, the recent wage adjustments that ar e above the inflation
target may hinder the disinflation process via its impact on expectations and
production costs.
15. Inflation expectations continue to improve. The distribut ion of inflation
expectations that displayed a wide dispersion in June and July gained a more
consolidated structure in recent months. Agents still expect that the disinflation
process will continue in the medium term. Nevertheless, me dium-term inflation
expectations are still significantly above the targets.
Monetary Policy and Risks
16. The Committee assesses that under the current circumstances m onetary policy
stance in Turkey is non-accommodative. The decline in infla tion expectations
has continued to tighten the monetary conditions in the last quarter of 2006. In
other words, although policy rates remained unchanged, the real rates have
continued to increase. Longer-term interest rates such as t he interest rates on
government securities and consumer loans stayed at higher levels.
17. We expect aggregate demand conditions to support the und erlying disinflation
process in the next couple of quarters. However, there are some risks regarding
the medium-term inflation outlook.
18. The main risk factor for the medium-term inflation out look can be stated as
higher-than-expected inflation inertia, as currently ma nifested in the inertia in
medium-term inflation expectations and services inflation. We expect that
slowdown in the aggregate demand will induce a gradua l decline in services
inflation in the period ahead. However, given the low relative productivity growth
in the sevices sector, backward-looking price setting behavior, and the
sensitivity of services prices to wage hikes, the developments i n prices of
services should continue to be closely monitored. The recent wage hikes have
highlighted these risks even more. Given that we plan to bring inflation down
from 10 percent to 4 percent in a fairly short period of time, the Committe
judges that the possibility of a sustained persistence in h igh services inflation
stands as a major risk for the medium-term outlook. Reali zation of such a risk
could require keeping the tight policy stance for an extended period.
19. Another risk for the inflation outlook is the uncertaint y regarding the impact of
the monetary policy on aggregate demand. Lags in mone tary policy
transmission are time variant across countries, and the Turki sh economy is no
exception. The sizeable slowdown in the third quarter o f 2006 was a result of
lower confidence due to financial market volatility in M ay-June period, rather
than an outcome of the tightened monetary policy. Alt hough the tightening
exercised since June 2006 started to be effective on private demand recently,
the extent and the duration of the slowdown in overall economic activity remains
to be seen. There are also some uncertainties related to the behavior of
government spending, which could represent an upside risk t o aggregate
demand, and therefore inflation in 2007. In this resp ect, the MPC has been
closely monitoring the macroeconomic impact of the develop ments in incomes
policy as well as public sector non-interest expenditures.
20. Another risk factor that may delay attaining the mediu m-term targets is the
possibility of a sudden change in the global financial m arket sentiment. Global
liquidity is still the major factor in shaping risk appet ite and volatility in financial
markets. Currently, the concerns over high inflation and thus higher interest
rates in the United States seem to have diminished. Howe ver, a faster than
envisaged slowdown in the world economy or disorderly developments owing to
global imbalances still remain as possible scenarios that ma y lead to another
wave of portfolio shock in emerging markets. The Committe e will revise the
policy rates if these shocks turns out to have lasting effects on the medium-term
inflation outlook.
21. There are favorable scenarios regarding the inflation o utlook as well as
unfavorable ones. Turkey is a net commodity importer. Al though a slowdown in
the global economic growth or a further easing in commo dity prices could have
an immediate adverse impact on domestic inflation throug h its impact on the
global risk appetite, it will also lead to a positive te rms of trade shock and thus
to a more favorable outlook in the medium term.
22. In light of these developments, the Committee decided t o keep the policy rates
on hold. The Committee has assessed that meeting the med ium term inflation
targets necessitates the maintenance of the cautious policy stance. The gap
between medium-term inflation expectations and the targets, the risks related to
services price inflation, and the uncertainties in global economy necessitate
keeping the tight policy stance.
23. The Committee closely monitors the lagged effects of the monetary tightening
since June 2006. Moreover, the potential impact of the progress in the structural
reform agenda and developments in incomes policy as well as public sector
non-interest expenditures on inflation and inflation e xpectations are carefully
evaluated. The Central Bank will not hesitate to tight en monetary policy in case
of any new developments that would adversely affect the medium-term inflation
24. The continuation of the European Union accession process an d the sustained
implementation of the structural reforms envisaged in th e economic program
are still crucial. Developments related to the structural reforms that would
enhance the quality of fiscal discipline in the medium a nd long run are followed
closely from the perspective of both macroeconomic stability and price stability.
Continued determination in implementing the decisive st eps taken in these
areas in recent years will increase the resilience of the economy against
possible changes in the global conjuncture.