SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2009-08-18

No: 2009 – 27
28 August 2009
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: August 18, 2009
Inflation Developments
1. Consumer prices increased by 0.25 percent in Jul y, while inflation decreased
to 5.39 percent year-on-year. Despite the fall in average inflation, core inflation
measures rose on the back of the year-on-year slowd own in seasonal clothing
discounts during July, and because of tax adjustmen ts on some durable
goods. Excluding tax effects, underlying inflation continue to hover around low
2. Despite having decelerated in July, annual unpro cessed food inflation still
remains elevated. In contrast, processed food prices increased by a mere 0.33
percent in July, falling year-on-year for the first time since the inception of the
consumer price index. The annual rate of increase i n processed food prices is
likely to rise owing to base effects in coming mont hs, while there may be a
downward correction in unprocessed food prices.
3. Changes in energy prices helped annual inflation ease further. Energy prices
dropped by 0.21 percent in July, leading to a sharp decline in annual inflation,
partly owing to the high base effect from a year ea rlier. Crude oil prices fell
month-on-month, but the fall could hardly pass through to the domestic market
owing to the mid-July lump sum special consumption tax levied on major fuel
products. Given that the tax increase will be partl y reflected in August inflation
and noting the pick up in international oil prices, fuel prices are expected to
rise in August.
4. The annual rate of increase in goods excluding e nergy and food climbed to
4.79 percent in July, largely due to tax adjustment s, as stated in the previous
Summary of the Monetary Policy Committee Meeting. P rices of tobacco
products soared by 11.57 percent due to the minimum lump sum tax
adjustment, adding approximately 0.5 percentage poi nts to July inflation.
Moreover, prices of durable goods (excluding gold) rose by 2.09 percent due
to phased-out tax cuts on certain consumer goods. T aken together, the tax
adjustments pushed inflation up by around 0.7 perce ntage points in July.
Meanwhile, clothing prices decreased at a slower pa ce in July compared to a
year ago owing to early seasonal discounts and a mo dest rise in clothing
consumption.
5. The rate of increase in services prices continue d to slow down amid
weakening domestic demand. Services inflation decli ned to a historic low of
5.92 percent year-on-year in July. Across the subca tegories, prices for
transport services, rents, as well as restaurants a nd hotels increased at a
more moderate pace than a year earlier. In seasonal ly adjusted terms, the
monthly rent inflation continued smoothly along a downward path. At the same
time, while tax measures to restore fiscal balances led to a marked increase in
compulsory traffic insurance premiums and notary pu blic fees in July, inflation
in services is expected to slow further in the forthcoming period.
6. Overall, the Monetary Policy Committee (the Comm ittee) noted that trend
inflation is hovering around low levels and advanci ng along a path that is
consistent with medium-term targets.
Factors Affecting Inflation
7. Recent data releases are in line with the outloo k presented in the July Inflation
Report. Industrial production fell by 9.7 percent i n June, at a more modest
annual rate than in May. Critically however, much o f the improvement in the
year-on-year difference was caused by calendar effe cts. Accordingly, the
Committee emphasized that judgments based only on a nnual growth rates
may be misleading. In fact, seasonally adjusted Jun e data indicate that
industrial production hardly changed month-on-month.
8. July data on capacity utilization show that the modest recovery in production
has continued into the third quarter. In seasonally adjusted terms, total
capacity utilization increased by 0.5 percentage po int month-on-month,
running 1 percentage point above the second-quarter average. The
Committee noted that although private sector capaci ty utilization displayed
some recovery during the second quarter, it still r emained at relatively
depressed levels.
9. Recent indicators for consumption confirmed that the fiscal stimulus measures
had only a temporary impact on domestic demand. Acc ordingly, consumption
indices and domestic automobiles sales fell sharply in July, while the demand
for consumer loans slowed down as well. Expectation s for domestic demand
and consumer confidence indices show similar patter ns. Specifically,
according to the July Business Tendency Survey, thr ee-month-ahead
expectations for the number of new orders received from the domestic market
declined month-on-month. Similarly, consumer confid ence indices decreased
for the first time in a long while. The Committee i ndicated that these
developments added to the uncertainty about the str ength of recovery in
consumer demand.
10. Domestic investment demand continues to fall. I n particular, data on capital
goods indicate that machinery and equipment investm ents declined further in
the second quarter. More specifically, the producti on of capital goods dropped
by 35.8 percent year-on-year in the second quarter and remained flat quarter-
on-quarter in seasonally adjusted terms. Meanwhile, imports of investment
goods fell by 18.3 percent year-on-year, but picked up in quarterly terms.
Investment expectations in the Business Tendency Su rvey and the demand
for investment-related credit in Banks’ Loans Tende ncy Survey reveal similar
patterns, indicating an unfavorable outlook for investment spending.
11. Foreign demand remains weak. The seasonally adjusted export quantity index
(excluding gold) has increased gradually during Apr il-June period. Data
published by Turkish Exporters Assembly show that t he modest growth of
underlying exports continued during July and August . The Committee
reiterated that foreign demand is likely to remain anemic in the near term, as
the recent signs of global economic recovery do not exhibit a strong enough
12. Demand uncertainty remains high, causing firms to maintain low inventory
levels and embrace a more cautious stance regarding production activities,
which continues to suppress investment demand and e mployment prospects.
In fact, there have not been any notable improvemen ts regarding employment
conditions. Non-farm employment dropped by 2.8 perc ent year-on-year during
the second quarter, while non-farm unemployment inc reased by 5.5
percentage points year-on-year to 17 percent. In se asonally adjusted terms,
non-farm employment losses are still apparent acros s industrial sectors and in
related services including commercial and transport-communication segments.
The growing number of non-farm unemployed as well a s the rise in labor
participation rates led to an increase in non-farm unemployment.
13. Overall, recent data releases indicate that the ongoing recovery in economic
activity would be gradual and protracted.
Monetary Policy and Risks
14. The Committee observed that despite some recent easing, tightness in
financial conditions still persists. According to t he CBT Bank Loan Tendency
Survey, the tightening of business loan lending sta ndards continued—albeit at
a slower pace—during the second quarter. Moreover, the survey suggests that
any support the credit channel would have regarding the recovery of economic
activity would be limited during the second quarter , given that the major driver
of the firms’ demand for loans has been the desire to restructure their debt
obligations.
15. The Committee members have indicated that bond yields have fallen in line
with the outlook presented in the Inflation Report, and predicted that bank
lending rates for consumer loans would follow gradu ally, as the lagged effects
of cumulative easing of 900 basis points since Nove mber 2008 would start to
ease credit conditions towards the last quarter of this year. However, the
current unfavorable labor market conditions are exp ected to restrain the
recovery in consumption, and therefore domestic dem and conditions would
continue to support disinflation. Therefore, in lin e with the perspective outlined
in the Inflation Report, inflation is expected to r emain at low levels for a long
period of time.
16. The Committee reemphasized the importance of fiscal discipline in maintaining
low levels of medium- and long-term interest rates, which are key
determinants regarding the recovery of both consumption and investment. The
implementation of a credible fiscal framework would bring down risk premiums
further, and hence lead to a permanent fall in long er-term interest rates. This,
in turn, would foster investment and labor demand, and thereby support the
recovery process. Therefore, the establishment of a credible medium-term
program ensuring fiscal discipline and debt sustain ability would have an
expansionary rather than contractionary impact on economic activity.
17. The Committee members stated that recent data r egarding the global
economy were consistent with the outlook presented in the Inflation Report.
Although the data on economic activity suggest that the worst may be over,
ongoing tight credit conditions and elevated unempl oyment rates are expected
to hold back the recovery in global economy for a while.
18. The Committee observed that the cumulative effe cts of the commodity price
declines has contributed to the slowdown in domesti c inflation over the past
year, especially by lowering processed food and ene rgy inflation, leading to a
significant base effect. Therefore, headline inflat ion may increase modestly at
the turn of the year through mid-2010, mainly owing to base effects, although
trend inflation is expected to remain at low levels in the period ahead. It should
be underscored that a rise in inflation stemming fr om this channel was already
factored into the monetary policy stance outlined in the July Inflation Report.
19. Overall, the tightness in financial conditions continues to some extent, and
uncertainties regarding the impact of the problems in financial markets on the
real economy persist, suggesting that downside risk s still remain. Therefore,
the Committee reiterated that it would be necessary for monetary policy to
maintain an easing bias for a long period of time, and envisaged that further
measured rate cuts would be necessary in the short term unless there is a
robust recovery in the economic activity.
20. The CBT has been taking the necessary measures at its disposal to contain
the adverse effects of the global crisis on the dom estic economy. Prudent
monetary policy is necessary but not sufficient to maintain the resilience of
the economy against the global crisis. Therefore, s trengthening the
commitment to fiscal discipline and the structural reform agenda is also
critical for facilitating expectations management a nd for supporting the
effectiveness of the monetary policy decisions. In this respect, timely
implementation of the structural reforms in the con text of the European Union
accession process remains to be of utmost importance.