SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Central bank: tcmb | Type: decision | Date: 2007-07-23

No: 2007- 18
23 July 2007
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 12 July 2007
Inflation Developments
1. Consumer prices fell by 0.24% in June, bringing 12-m onth cumulative inflation
down by 0.63 percentage points to 8.60%. Accordingly, annual inflation registered
a total decline of 2.26 percentage points in the past 3 months and stayed within
the uncertainty band.
2. Unprocessed food prices remain volatile. Last month’s S ummary of the
Monetary Policy Committee Meeting mentioned the possib ility of more limited
price declines of unprocessed food this summer due to early harvest of some
vegetable items. Indeed, the decline in vegetable pri ces in June was less than
last year’s levels and thus the annual inflation of unp rocessed food prices
increased, notwithstanding the partial correction in fru it prices. Volatility in fruit
and vegetable prices continue to pose risks to the course of headline inflation.
Moreover, bad crop of wheat may have adverse effects on consumer prices
through bread and grain products.
3. The rise in oil prices had adverse effects on inflatio n via fuel prices in the past
couple of months. Utility prices and non-oil energy ite ms however, continued to
display a benign course.
4. Durable goods (excl. gold) inflation fell to 0.32% , per annum, in response to
both the strong Turkish lira and the easing demand. On the other hand, the
annual inflation in clothing and footwear prices rose to 7.15%.
5. Although the services inflation ceased to decline in Ju ne, developments in
sub-items suggest a continued downward trend: The main d river of services
inflation in June was the rise in mobile phone call rat es. The delayed effects of
rising oil prices on transportation services also somewhat restrained the decline in
services inflation. On the other hand, monthly inflati on in other services items
remained below last year’s levels. In fact, the cumulati ve rise in service prices
was only 4.61% in the first half of the year, the low est 6-month figure since the
2003-based CPI index was introduced. Annual services infl ation is expected to
further decline in the forthcoming period.
6. Special CPI aggregates also respond to last year’s mon etary tightening. The
favorable course of services and durable goods prices in th e last three months
significantly curbed the inflation in special CPI aggregates. Inflation is expected to
come further down in the next couple of months, on the back of the lagged effects
of monetary tightening and the high base of the second half of 2006.
Factors Affecting Inflation
7. The Monetary Policy Committee (the Committee) assesse s that the recent
data on economic activity is broadly consistent with the o utlook presented in the
April Inflation Report.
8. Although the GDP grew by 6.8% in annual terms dur ing the first quarter of
2007, seasonally adjusted growth was only 0.4%, indicating an ongoing slowdown
in economic activity.
9. Contribution of domestic demand to GDP growth was l imited during the first
quarter of 2007. Seasonally adjusted data suggest that private consumption and
private investment expenditures displayed a moderate i ncrease over the previous
quarter, while construction investment continued to grow steadily.
10. Consumption spending continued to moderate in the second quarter. The
pace of growth in total consumer loans was low during th e second quarter
compared to the first half of 2006, although personal expenditure loans gained
momentum in this period. While automobile loans contin ued to decrease in the
second quarter, other leading indicators on domestic dema nd such as domestic
sales of white goods and imports of consumer goods declined slightly on
seasonally adjusted terms during April-May period. Takin g into account the
significant base effect driven by the strong demand of t he last year, the annual
growth in private consumption demand is expected to tur n to negative in the
second quarter.
11. Indicators of investment demand point to a modest r ecovery. While imports of
capital goods displayed a recovery during April-May, th e decline in commercial
vehicle sales continued to restrain machinery and equipme nt investment.
Construction investment, on the other hand, keep growin g, albeit at a moderate
pace compared to the previous two years.
12. In the first quarter, annual real growth rate in total government spending was
9.1%, moderating the slowdown in aggregate demand. P rimary spending
increased by 29.3% in nominal terms, per annum, during the April-May period,
indicating that government spending continued to rise a t a high pace in the
second quarter. This observation is also supported by the January-June figures of
the Treasury's primary cash balance.
13. External demand continues to support the economic act ivity. Industrial
production was strong in May with the stimulus of export s. Leading indicators
suggest that export growth remained robust also in June and July. Strong external
demand and ongoing productivity gains should support th e export growth in the
forthcoming period. However, considering the strong secon d-half figures of last
year, the annual rate of growth in exports is expected to moderate in the
upcoming period.
14. The marked decline in inflation had a favorable i mpact on inflation
expectations. Improvement in the expectations should cont inue in the upcoming
period as the inflation keeps declining. However, the C ommittee reads the
existing gap between medium-term inflation expectatio ns and targets as a factor
requiring caution.
15. In sum, while the developments in energy and food prices, public
expenditures, and external demand since the last quarte r of 2006 restrain the
disinflation process, domestic demand and inflation contin ue to decelerate thanks
to the lagged effects of strong monetary tightening.
Monetary Policy and Risks
16. Recent developments are broadly in line with the April Inflation Report.
Therefore, adhering to the outlook presented in the R eport, the Committee
envisions a measured easing starting from the last quarte r of 2007. However, the
exact timing and extent of the easing may vary depend ing on the incoming
information regarding external demand, public expend itures and other
determinants of medium term inflation outlook.
17. It should be stressed that this policy stance is based on the current information
set and thus it should by no means be interpreted as a co mmitment on behalf of
the Committee. The Committee highlighted the follow ing uncertainties that could
necessitate a significant revision in the monetary policy outlook in either direction:
18. Inflation expectations remain sticky, partly owing t o the elevated headline
inflation figures of the past year. Uncertainties regar ding the food and oil prices
and the incomes policy in 2007 further add to the stickin ess in inflation
expectations. The present gap between medium term expe ctations and targets
suggests that the target inflation may have been servin g less of an anchor
recently. This constitutes a risk for wage setting behavior , and hence, for services
inflation. Realization of such a risk would slowdown the pace of disinflation,
possibly requiring a tighter-than-envisaged monetary policy.
19. There are certain services items, of which, inflation inertia is driven by
structural factors and thus, cannot simply be explained by backward indexation.
Needless to say, these prices can hardly be influenced by m onetary policy. For
example, annual rent inflation have remained sticky ar ound 20 percent in the past
three years, contributing to annual headline inflatio n by about one percentage
points each year. Rent inflation is expected to moderat e in the next couple of
months, and further stabilize in the medium to long t erm, as the housing supply
keeps rising. Nevertheless, the possibility that rent infl ation will continue to
exceed the other services inflation is considered as a risk f actor against the
disinflation process.
20. The monetary transmission mechanism has proven to be effective during the
past year. Despite the increase in non-interest governme nt spending and the
robust external demand that have restrained the speed of disinflation, monetary
tightening has been successful to bring inflation back to t he projected path
heading towards the medium term targets. However, in order to reach the
medium term target of 4 percent, the domestic demand n eeds to stay under
control for a while. However, domestic demand condition s may turn less
supportive for the disinflation process, once the prevail ing uncertainties fade out
and the long-term interest rates continue to decline du ring the second half of the
year. Such a situation could lead monetary policy to sta y more cautious than
implied by the baseline scenario. Nonetheless, such an out come would be less
likely, should the cautious monetary policy stance backed by fiscal discipline.
21. Possible fluctuations in the global liquidity condit ions continue to pose risks to
the inflation outlook. The inflation and growth outl ook for the developed
economies are still not clear, and thus, international f inancial markets continue to
be sensitive to new data releases. Ongoing uncertainties over the global
imbalances stand out as another risk factor that might lea d to abrupt changes in
portfolio preferences and liquidity conditions. The Cen tral Bank of Turkey will limit
the potential inflationary effects of a possible shift i n risk perceptions by pursuing
an active liquidity management strategy.
22. In this respect, the Committee, considering the curre nt levels of liquidity,
assessed that the Central Bank Liquidity Bills could be use d, in addition to the
current tools used in open market operations, to enhance the effectiveness of
liquidity management when necessary.
23. Prudent monetary policy is necessary but not sufficien t for achieving price
stability. The role of fiscal policy and structural refor ms are also critical in this
process. In this respect, the European Union accession process a nd the
implementation of the structural reforms envisaged in t he economic program
remain to be important for long-term stability. Part icularly, advances in structural
reforms that would enhance the quality of fiscal discipli ne are monitored closely
with regard to their effects on both macroeconomic and price stability.