Durmuş Yılmaz: Recent economic and financial developments in Turkey
Speech by Mr Durmuş Governor of the Central Bank of the Republic of Turkey, at
Yılmaz,
the press conference for the presentation of the Inflation Report, Ankara, 27 October 2009.
* * *
Distinguished Guests and Members of the Press,
Welcome to the press conference held to convey the main messages of the October 2009
Inflation Report, one of the most important communication tools of the inflation-targeting
regime of the Central Bank.
The report typically summarizes the economic framework addressed in monetary policy
decisions, elaborates global and domestic macroeconomic developments and presents the
medium-term inflation forecasts, which have been revised in view of previous quarter
developments, along with the monetary policy stance.
I would like to start my speech by underlining once more that the Central Bank's
assessments on inflation outlook and economic activity, which I will share with you in detail
shortly, should be considered in the light of existing global conditions. The global crisis,
which erupted in developed markets and spread across the world during the last quarter of
2008, has continued to affect the economic outlook, albeit less forcefully, during the third
quarter of 2009. In this period, data releases on activity indicated that the recovery continues
to gain traction with growth forecasts being revised upwards after sustained downward
revisions (Figure 1). However, improvements in many leading indicators are still tentative,
problems across credit markets linger, and employment remains in a precarious state, all
suggesting that recovery is likely to be anemic and protracted.
Figure 1: Revisions to GDP Forecasts in Advanced Economies
in the Last Three Months (Seasonally Adjusted, 2008Q2=100)
104
102
100
98
96
94
USA (Sep09) USA (June09)
92
Euro Zone (June09) Euro Zone (Sep09)
90
2 3 4 1 2 3 4 1 2 3 4 1 2
2008 2009 2010 2011
Source: Consensus Forecasts, June and September.
1. Inflation developments
Distinguished Members of the Press,
Inflation developments observed in the first three quarters of 2009 were shaped around the
framework that I have already mentioned. The crisis was characterized by a steep drop in
economic activity, which was mainly driven by shrinking external demand, tighter financial
conditions, and rising precautionary saving. The sharp contraction in economic activity and
the collapse of commodity prices have brought down inflation rates across the world,
including Turkey. In this respect, after displaying a sharp decline in the first half of 2009,
annual inflation maintained a downward trend in the third quarter to become 5.27 percent
breaching the lower limit of the uncertainty band set (Figure 2).
Figure 2: Annual CPI Inflation and Target Path
14
12
10
8
6
4
Annual CPI Inflation Outer Band
2 I* Target Path
0
0107 0307 0507 0707 0907 1107 0108 0308 0508 0708 0908 1108 0109 0309 0509 0709 0909 1109
* Temporary tax adjustments corrected I Index
Source: TURKSTAT, CBRT.
Figure 3: Contribution to Annual CPI Figure 4: CPI Sub-groups
Inflation
(Third Quarter Percentage Change)
(Annual Percentage Change)
Food and Energy Tobacco and Gold
12
14 2006-2007 Average
Services Core Goods
10
2008
12
8
2009
10
6
8 4
2
6
0
4
-2
2
-4
-6
0
Food Energy Tobacco Core services
and Gold* Goods**
0607 0907 1207 0308 0608 0908 1208 0309 0609 0909
* Food and Energy: Food, non-alcoholic beverages *Core Goods: Goods excluding food and nonalcoholic
and energy. beverages, energy, alcoholic beverages and tobacco
and gold.
** Tobacco and Gold: Alcoholic beverages, tobacco
and gold.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
Although processed food and energy were instrumental in the downward trend of inflation,
core goods and services inflation also hovers around historic lows (Figure 3). In the third
quarter, the disinflation process lost pace due to the tax measures to restore fiscal balances.
In addition, phased-out tax cuts on durable consumption goods were one of the featured
developments with regard to consumer prices in the third quarter. All in all, the decline in
prices of core goods remained below previous levels (Figure 4).
In the third quarter of the year, the rate of increase in services prices continued to slow down
in the face of weakening domestic demand and the fading of high base effect caused by
supply shocks in the previous year. Seasonally adjusted data suggest that the main trend of
services inflation is at historically low levels, this prevailing across all sub-groups. It is
especially noteworthy that monthly rent inflation continued smoothly along a downward path
(Figure 5 and Figure 6). Nevertheless, we expect that the services sector will enter a gradual
recovery trend, however prices will continue to increase at a moderate pace in the last
quarter of the year.
Figure 5: Services Prices Figure 6: Services Prices
(Seasonally Adjusted, 2-Month Averages) (Percentage Change, First Nine
Months)
2.0 16
2006-2007 average
2008
1.8
Services
14
2009
1.6
Rent
12
1.4
10
1.2
1.0
8
0.8
6
0.6
4
0.4
0.2
2
0.0
0
0905 0306 0906 0307 0907 0308 0908 0309 0909 Services Other Transport Rent Restaurant
Services services services
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
As I believe that movements of core inflation indicators are essential to better understand the
underlying trend of inflation and to evaluate developments more effectively, I would like to
further elaborate on these developments. Core inflation indicators maintained their downward
trend in the third quarter. By September, annual inflation measured by the CPI excluding
energy, unprocessed food, alcoholic beverages, tobacco and gold (H index) became 2.44
percent, while annual inflation measured by the I index, which excludes processed food
prices, became 3.37 percent. In this period, although the partial withdrawal of tax cuts on
durable goods pushed core inflation indicators upwards, seasonally and tax adjusted data
indicate that the underlying trend of inflation is still low (Figure 7 and 8). Here I would like to
highlight that the said indicators might increase, albeit modestly, in the upcoming period with
the expiration of temporary tax cuts in October.
Figure 7: Core Inflation Indicators Figure 8: Core Inflation Indicators
(Annual Percentage Change) H and I
(Seasonally Adjusted 2-Month
Averages)*
8
1,6
H I
7
1,4
6
1,2
5
1,0
4
0,8
SCA-I
3
SCA-I* 0,6
2
0,4
1
0,2
0
0,0
0907 1207 0308 0608 0908 1208 0309 0609 0909
0905 0306 0906 0307 0907 0308 0908 0309 0909
*Corrected for temporary tax effects. *Both series are corrected for temporary tax effects.
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
Accordingly, in the last quarter, inflation expectations displayed a downward trend in all time
frames. Yet, this trend continued less forcefully and the expectations curve flattened as the
maturities extended (Figure 9). Currently, expectations for end-2009 are anchored at 5.40
percent, well below the target. On the other hand, end-2010 inflation expectations, calculated
by averaging inflation expectations for 12 and 24-months ahead remain slightly below the
target (Figure 10).
Figure 9: 12 and 24-Month Ahead CPI Figure 10: Inflation Expectations Survey*
Expectations*
(Annual Percentage Change)
(Annual Percentage Change)
10
8.0
12-Month
7.5
24-Month
9
7.0
6.5
8
6.0
5.5
7
6,29
5.0
October
6
4.5
6,19
July
4.0
Target
5
3.5
3.0
4
1009 0110 0410 0710 1010 0111 0411 0711 1011 0112
The sharp fall in inflation observed over the past year is not peculiar to Turkey. Inflation rates
have plummeted all over the world since the peak of the crisis due to downward pressures
arising from demand and cost conditions. Although there has been a slight increase in rates
with the removal of the high base effect of the previous year in the third quarter (Figure 11),
core inflation data indicate that the main trend of inflation in both developed and emerging
markets is downward (Figure 12).
Figure 11: CPI in Developed and Emerging Figure 12: Core CPI in Developed and
Markets Emerging Markets
(Annual Percentage Change) (Annual Percentage Change)
Developed Markets
4
5 8 Developed
Markets
Emerging Markets
7
4
Emerging
(rhs)
6 Markets
3
3
5
2
4
1
3
2
0
2
-1
1
-2 0
1
1205 0606 1206 0607 1207 0608 1208 0609
1205 0606 1206 0607 1207 0608 1208 0609
Source: Bloomberg, CBRT. Source: Bloomberg, CBRT.
2. Monetary policy response
After commenting briefly on inflation developments, I would now like to cover the policies
pursued by the Central Bank during the last quarter.
Anticipating that inflation would decrease sharply following the last quarter of 2008, when the
global financial crisis deepened, the Central Bank of Turkey (CBRT) focused on alleviating
the potentially harsh impact of the global financial crisis on the domestic economy.
Throughout this process, the CBRT has delivered sizeable cuts in policy rates, while
providing liquidity support to facilitate the smooth operation of credit markets. In this respect,
the CBRT continued to cut interest rates in the third quarter, bringing the cumulative rate cuts
to 1000 basis points since November 2008. Therefore, the CBRT lowered policy rates more
than any other emerging market central bank since the intensification of the global crisis
(Figure 13 and 14).
Figure 13: Policy Rates in Emerging Figure 14: Change in Policy Rates
Markets * between September 2008 and October
2009 in Emerging Markets*
September 2008-October 2009 (Basis
Points)
20 Emerging Markets 0
Turkey
-200
17
-400
14
-600
11
-800
8
-1000
5
-1200
0106 0706 0107 0707 0108 0708 0109 0709
Peru India
Chile
Brazil
Africa
Poland Russia
Turkey Mexico
Thailand
Romania Hungary
Columbia
Indonesia
South
* As of 19 October 2009. * As of 19 October 2009.
Source: Bloomberg, CBRT calculations. Source: Bloomberg, CBRT.
Data releases on inflation and economic activity since the inception of the rate cutting cycle
have vindicated these preemptive monetary policy decisions, and thereby strengthened the
impact of policy decisions on expectations, gradually bringing government bond yields to
historically low levels on the back of improvement in risk premiums (Figure 15). CBRT's
effective communication policy and management of expectations, along with market
perceptions indicating that the Medium Term Program (MTP) released in September is
consistent and realistic, played a key role in bringing down government bond yields. This
downward trend particularly accelerated after providing a medium-term policy perspective in
the July Inflation Report.
Figure 15: Interest Rate Developments
(Percent)
26
21
16
Bond yields
IMKB Tahvil ve Bono Piyasası Faiz Oranı
11
(gösterge niteliğinde, bileşik)
CBT Policy Rate (compound)
TCMB Gecelik Faiz Oranı (bileşik)
6
Market interest rates in all maturities are declining. It is noteworthy that long-term yields
declined more than shorter-term yields and displayed a flatter yield curve (Figure 16 and 17).
Figure 16: Yield Curves* Figure 17: Difference Between
LongTerm and Short-Term Interest Rates*
(Percent)
Release of the July Inflation
10
28.July.2009
Report
9
15 01.October.2009
8
7
13
6
Yield
11
5
4
9
3
2
7
0109 0209 0309 0409 0509 0609 0709 0809 0909 1009
0.5 1 1.5 2 2.5 3 3.5 4
Term
* Estimated by using the compound yields on the bonds *Difference between interest rates with 4-year and
in the ISE Bonds and Bills Market, based on the 6month maturities of the yield curve estimated by ENS
Extended Nelson-Siegel (ENS) method. method, 5-day moving average.
Source: CBRT. Source: CBRT.
The downward trend in market interest rates also reverberated on medium term real interest
rates causing real market interest rates to go down compared to the second quarter and to
hover around historically low levels (Figure 18). Besides, policy rate cuts and improvements
in global risk perceptions have started to have favorable effects on credit markets. In fact,
consumer loan rates, which were reacting rather sluggishly to policy rate cuts, have
displayed a significant decline in this period (Figure 19). Moreover, the CBRT reduced
Turkish lira reserve requirements in October, in order to further alleviate the tightness in
credit conditions, and thus enhance the effectiveness of policy rate cuts. Within this
framework, the recovery in credit markets is expected to continue gradually throughout the
last quarter. However, the effectiveness of the credit channel in supporting economic activity
is still partly restrained owing to the ongoing tightness in lending standards for small and
medium-sized enterprises.
Figure 18: Medium-Term Real Interest Rates
Figure 19: Loan Rates*
from the Yield on Government Securities*
(Percent)
(Percent)
25
2.4
17
2.2 20
15
2.0
13
15
1.8
11
1.6 10
9
1.4
5
7
Housing Auto Loan
1.2
Other Consumer Inflation Report
5 Corporate (rhs)
1.0 0
1207 0208 0408 0608 0808 1008 1208 0209 0409 0609
0206 0506 0806 1106 0207 0507 0807 1107 0208 0508 0808 1108 0209 0509 0809
*2-year real interest rates, calculated using 2-year * Monthly interest rate on consumer loans, yearly
nominal interest rates from the yield curve and inflation interest rates on business loans.
expectations from the CBRT's Expectations Survey.
Source: CBRT.
Source: ISE, CBRT.
Against this background, referring to the partial improvements in labor and credit markets, I
would like to remind you once more that the Monetary Policy Committee indicated after the
October meeting that a slowdown in the pace of rate cuts would be considered at the next
meeting depending on economic data and developments. However, it was also noted that
lingering problems across the global economy were still a concern and that uncertainties
regarding the strength of the recovery remain. Taking these factors into account, I should
reiterate that it would be necessary for monetary policy to maintain an easing bias for a long
period of time.
3. Inflation and monetary policy outlook
Distinguished Members of the Press and Esteemed Guests,
After summarizing inflation and monetary policy developments in the third quarter of 2009, in
this part of my speech, I would like to share with you the evaluation of the inflation outlook
and monetary policy of the Central Bank of Turkey in the upcoming period. Firstly, I will
briefly describe the economic framework underlying these forecasts. Then, I will outline the
Central Bank's inflation forecasts presented in the Inflation Report, which will be posted on
our website shortly.
Although the recovery in global economic activity is expected to be slow and gradual, the
perception that the worst part of the crisis is over has continued to support optimism across
financial markets and increased the appetite for risk during the third quarter. Parallel to the
recovery in global risk perceptions, the risk premia of emerging markets fell rapidly and
reached almost pre-crisis levels (Figure 20). In this period, the perception was that many
emerging markets, which had been considered in the pre-crisis period as 'highly risky', were
not as risky as envisaged. Favorable statements of credit rating agencies regarding the
sovereign rating of Turkey - one of the leading countries among these emerging markets -
alongside the relatively lower level of Turkey's risk premium compared to other emerging
markets - as was the case throughout the crisis - have confirmed the decline in Turkey's
relative riskiness (Figure 20).
Figure 20: Risk Premium Indicators
2008 yılının Ağustos Ayına Göre Ülkelerin 5
900
Yıllık CDS Değişim Oranları
(29.08.2008 değeri, 1 olarak alınmıştır)
800 EMBI+ Türkiye
EMBI+
5.5
Turkey
Türkiye
EMBI+
700
Brazil
Brezilya
4.5
G.Afrika S. Africa 600
Macaristan
Hungary
3.5
500
G.Kore
S. Korea
400
2.5
300
1.5
EMBI+ Turkey
200
0.5
100
0808 1008 1208 0209 0409 0609 0809
1007 0308 0808 0109 0609
Source: Bloomberg, CBRT.
In the third quarter of 2009, in line with the improvement in global risk perceptions, capital
inflows towards emerging markets through portfolio movements increased and currencies of
the said countries began to appreciate (Figure 21). Turkey was no exception to this
development. This development prevented the hikes in commodity prices in the third quarter
to translate into domestic unit costs.
Figure 21: Exchange Rate Developments
FX Volatility
Kur Oynaklığı*
TL/Kur Sepeti (0,5 euro+0,5 ABD doları)
0.04
2.1 TRY/Basket (0.5 Euro+0.5 USD) 1000
EMBI+Türkiye (sağ eksen) Brazil
Brezilya
EMBI+ Turkey
900 Chile
Şili
2
Czech Rep.
Çek Cumh.
800
Hungary
0.03
Macaristan
1.9 Mexico
Meksika
700
New Zealand
Y.Zelanda
Poland
1.8 Polonya
600
S. Africa
0.02 G.Afrika
S. Korea
500 Kore
1.7 Turkey
Türkiye
400
1.6
0.01
300
1.5
200
1.4 100 0
0607 0907 1207 0308 0608 0908 1208 0309 0609 0909 0106 0506 0906 0107 0507 0907 0108 0508 0908 0109 0509 0909
*50-day moving standard deviation of daily exchange rate changes.
Source: Bloomberg, CBRT.
Distinguished Members of the Press,
The second quarter gross domestic product (GDP) release was broadly in line with the
outlook presented in the July Inflation Report. Within this framework, the GDP decreased by
7 percent in the second quarter of 2009 compared to the same quarter last year (Figure 22).
Meanwhile, the GDP in seasonally adjusted terms displayed a significant upswing compared
to the previous quarter bringing an end to the persistent contraction in economic activity
observed since the second quarter of 2008 (Figure 23). While domestic consumption
demand rose markedly during the second quarter mainly owing to the fiscal stimulus
package, external demand remained weak. The continued run-down in inventories limited
production and resource utilization and therefore curbed the effect of the recent rapid growth
on inflation. Moreover, high unemployment rates have continued to suppress domestic
demand. Accordingly, aggregate demand conditions have continued to support disinflation.
Figure 23: GDP
Figure 22: GDP Growth by Periods
(Seasonally Adjusted, at 1998 Prices,
(Percent)
Billion TL)
15 27
9.4
8.4
10
7.2
6.9
6.2
5.3
4.7
24
5
2.8
0.9 1.0
0
21
-5
-5.7
-6.5
-7.0
-10
18
-15
-14.3
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
-20
2003 2004 2005 2006 2007 2008 2009
2001 2002 2003 2004 2005 2006 2007 2008
2008-1 2008-2 2008-3 2008-4 2009-1 2009-2
Source: TURKSTAT. Source: TURKSTAT, CBRT.
On the production side, value added fell year-on-year across non-farm sectors. The 3.1
percent value added in services provided the most negative contribution to GDP growth
(Figure 24). On the spending side, the adverse impact of private demand on annual GDP
growth substantially decreased compared to two preceding quarters. Meanwhile, the
unfavorable trend in private investment expenditures continued in the second quarter and
private investment became the demand component that made the most negative contribution
to GDP growth (Figure 25).
Figure 24: Contribution to GDP Growth Figure 25: Contribution to GDP Growth
from Production from Spending
(Percentage Point) (Percentage Point)
1 0,5 6
3,6
0 4
-1 2
-0,5
0,1 0,2
-1,3
-2 0
-2
-3
-0,8
-2,5
-3,1
-4 -4
-3,6
-6
-5
-6,4
-8
-6
-7.0
Private Priv. Public Public Stock Net GDP
-7
Cons. Inv. Cons. Invest. Exp.
-7,0
-8
Agricul. Industry Constr. Serv ices Net Tax GDP
Source: TURKSTAT. Source: TURKSTAT.
Compared to the previous quarter, the primary determinant of growth in the second quarter
was private consumption demand that displayed an upswing, mainly owing to the fiscal
stimulus package (Figure 26). While assessing whether the pick-up in private consumption
demand indicates a lasting recovery trend or not, it would be wise to evaluate trend
discrepancies in different sub-components and interpret data pertaining to the third quarter
accordingly. Second quarter national accounts data confirm that the pick-up in private
consumption demand stemmed mainly from fiscal stimulus-driven advanced demand for
certain goods categories. Meanwhile, the demand for goods that were not subject to tax
reductions stayed almost constant (Figure 27).
Figure 26: Contribution to GDP Growth Figure 27: Consumption of Resident and
from Spending by Periods
Non-resident Households
(Percentage Point)
(Seasonally Adjusted,
at 1998 Prices, Billion TL)
8 19 14
7.1
5.9
13.5
18
13
3.8
12.5
17
12
16 11.5
76543210
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
-0.1
-1
-0.4
2005 2006 2007 2008 2009
-1.0
-1.1
-2
Consumption
GDP Priv. Stock Exports Public Private Imports
Cons. Change Spending Inv.
Consumption excl. Furniture, Housing Goods and
Services, Transportation, Communication
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
Recently issued data indicate that this trend continued in the third quarter as well and
consumption demand has adopted a weaker course following its marked increase during the
second quarter. Although private investment is expected to increase slightly in the third
quarter, the low capacity utilization rate and the high uncertainty in demand is expected to
hold back the recovery in investments. Accordingly, total aggregate domestic demand is
expected to stay flat in the third quarter, after increasing significantly in the second quarter
(Figure 28).
Figure 28: Total Aggregate Domestic Demand
(Seasonally Adjusted, at 1998 Prices, Billion TL)
28
26
24
22
20
18
16
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3*
2003 2004 2005 2006 2007 2008 2009
*Forecast.
Source: TURKSTAT, CBRT.
Data pertaining to the third quarter indicate that external demand remained weak and the
negative contribution of net exports to quarterly growth persisted. The course of external
demand will be determined by the outlook of the speed and timing of global recovery. The
medium-term outlook for global growth indicates that the GDPs of developed countries would
not reach the pre-crisis level for an extended period of time. Within this framework, external
demand is expected to continue to suppress aggregate demand for quite some time (Figure
29).
Figure 29: Actual and Forecast GDP Growth in Developed
Countries
(Seasonally Adjusted, 2008Q2=100)
104
102
100
98
96
94
92
90
USA Eurozone Japan England
88
86
2 3 4 1 2 3 4 1 2 3 4 1 2
2008 2009 2010 2011
Source: Consensus Forecasts, September.
In the June-August period, non-farm employment increased for the first time since the
second quarter of 2008, in seasonally adjusted terms. Parallel to this development, the
upward trend in unemployment rates reversed. In the mentioned period, unemployment rates
increased in annual terms while they decreased compared to the second quarter in
seasonally adjusted terms (Figure 30). Indicators such as capacity utilization rates and per
capita hours worked suggest that resource utilization remains low throughout the economy.
Given that ample slack would continue to be an obstacle to investment and employment,
recent signs of improvement in employment data is not expected to turn into a significant
recovery, suggesting that unemployment is likely to remain elevated for an extended period
of time. Therefore, unit labor costs and domestic demand would continue to support
disinflation.
Figure 30: Unemployment Rates
(Seasonally Adjusted, Percent)
19
Nonfarm Unemployment Rate
17
Unemployment Rate
15
13
11
9
0107 0307 0507 0707 0907 1107 0108 0308 0508 0708 0908 1108 0109 0309 0509 0709
Source: TURKSTAT, CBRT.
As I have mentioned before, the tightness in credit conditions has been on an easing trend.
Accordingly, developments in the credit market would begin to support domestic economic
activity as of the fourth quarter of the year and the impact of monetary policy is expected to
be more visible in the medium term. However, the rising domestic borrowing requirement of
the government, ongoing problems in the global economy, and elevated levels of
unemployment would continue restraining credit expansion.
Overall, economic activity is expected to recover gradually, with annual growth rates posting
positive figures starting in the last quarter. However, resource utilization is anticipated to
remain below the long-term average for some time. In this context, our medium-term
forecasts envisage that the output gap - albeit closing faster than envisaged in the July
Report - will remain disinflationary until mid-2012.
Although global economic growth is expected to follow a gradual path, commodity prices
continued to follow a rising trend in the third quarter, with the growing perception that
recovery is on the way (Figure 31). Accordingly, oil prices were above our assumption of
USD 60 per barrel in the third quarter (Figure 32). Therefore, the previous assumption of
end-year oil price levels are revised up from USD 60 per barrel to USD 70 for 2009, from
USD 70 to USD 75 for 2010, and from USD 70 to USD 80 for 2011 and thereafter. Moreover,
in line with oil prices, imported input prices are also assumed to increase gradually
throughout the forecast horizon in response to the slow recovery in the world economy.
Figure 31: S&P Goldman Sachs Figure 32: Crude Oil (Brent) Prices
Commodity Indices* (US dollar/barrel)
All Commodities Energy
150
Metal Precious Metals
Agriculture
300
110
200
70
100
0
30
0107 0507 0907 0108 0508 0908 0109 0509 0909
0105 0106 0107 0108 0109
Source: Bloomberg.
*Average of January 2007 has been taken as 100.
Source: Goldman Sachs.
The course of food prices is another important assumption for inflation forecasts. Contrary to
the upward trend in previous years, the seasonally adjusted food prices displayed a decline
in the third quarter (Figure 33). This change was mainly driven by the decline in unprocessed
prices fuelled by prices of fruits and vegetables decreasing at a faster pace than seasonal
averages. Unprocessed food prices had displayed an upswing in the first half of the year.
Deceleration in annual inflation in processed food prices continued as well and prices fell
compared to the same period of the previous year for the first time in the history of the index
(Figure 34). The July Inflation Report envisaged food inflation to be 7.5 percent at the end of
2009 and 6 percent for the following years. However, better than expected outcomes
regarding food prices necessitated a downward revision in food inflation to 5.8 percent for
end-2009, while the projection of 6 percent was maintained for the following years.
Figure 33: Food Prices Figure 34: Food Prices
(Seasonally Adjusted, (Annual Percentage Change)
Quarterly Moving Average)
2,5 27
Processed
24 Unprocessed
2
21
16,70
1,5
18
15
1
0,5
0
-0,5
129630
-0,43
-3
-1
0608 0708 0808 0908 1008 1108 1208 0109 0209 0309 0409 0509 0609 0709 0809 0909
0206 0606 1006 0207 0607 1007 0208 0608 1008 0209 0609
Source: TURKSTAT, CBRT. Source: TURKSTAT, CBRT.
Given the current economic climate, assumptions on foreign economic activity remain
increasingly important in building medium-term forecasts. Therefore, as I have mentioned
earlier in my speech, better-than-expected growth figures regarding the second quarter and
continued recovery in leading indicators pertaining to economic activity in the third quarter
together has bolstered perceptions that the worst part of the crisis is over. Accordingly, while
producing medium-term forecasts, assumptions pertaining to global economic activity have
been revised slightly upwards compared to those in the July Inflation Report and the
forecasts were made on the assumption that external demand would remain weak for an
extended period (Table 1).
Furthermore, revised forecasts envisage world interest rates to remain low for an extended
period of time. Regarding fiscal policy, it is assumed that the consistent framework outlined in
the Medium Term Program (MTP) will be implemented and further enhanced by structural
measures that would strengthen fiscal discipline. In this respect, it is assumed that the fiscal
stance will remain expansionary - but less so than the one in 2009throughout 2010, and
fiscal tightening will gradually be adopted starting from 2011. Moreover, in line with the MTP,
it is envisaged that the rising debt-to-GDP ratios will reverse their course steadily starting
from 2011, and hence the risk premium would not display any significant changes throughout
the forecast horizon.
Table 1: Annual Growth Forecasts
2009 2010
Previous New Previous New
Forecast Forecast Forecast Forecast
IMF
World -1,4 -1,1 2,5 3,1
Developed Economies -3,8 -3,4 0,6 1,3
United States -2,6 -2,7 0,8 1,5
Euro Area -4,8 -4,2 -0,3 0,3
Developing Countries 1,5 1,7 4,7 5,1
OECD
All OECD -4,1 -3,7 0,7 -
United States -2,8 -2,8 0,9 -
Euro Area -4,8 -3,9 0,0 -
Consensus
Economics*
World -2,3 -2,3 2,6 2,7
United States -2,6 -2,5 2,4 2,6
Euro Area -4,4 -3,9 1,0 1,1
Source: IMF World Economic Outlook, July and IMF World Economic Outlook Update,
October.
OECD Economic Outlook, June and OECD Economic Outlook, September.
*Consensus Forecasts, September and October.
Against this background, assuming a limited amount of further easing and constant policy
rate until the end of 2010, medium-term forecasts suggest that, with 70 percent probability,
inflation will be between 5.0 and 6.0 percent with a mid-point of 5.5 percent at the end of
2009, and between 3.9 and 6.9 percent with a mid-point of 5.4 percent by the end of 2010.
Furthermore, inflation is expected to decline to 4.9 percent by the end of 2011 and to 4.8
percent by the third quarter of 2012 (Figure 35).
Figure 35: Inflation and Output Gap Forecasts*
(Percent)
Forecast Range* Output Gap
Tahmin Aralığı* Çıktı Açığı
End-year Inflation Targets
Uncertainty Band for 2009
2009 için Belirsizlik Aralığı Yıl Sonu Enflasyon Hedefleri
13
Control Horizon
11
Kontrol Ufku
9
7
5
3
Yüzde
1
-1
-3
-5
-7
-9
2 3 4 1 2 3 4 1 2 3 4 1 2 3
2009 2010 2011 2012
* Indicates a confidence interval of 70 percent
While better than expected outcomes in food prices necessitated a downward revision in
food inflation for end-2009, this effect was offset for the medium term by the upward revision
of the assumptions for global economic activity and oil prices, and therefore, there has not
been a major change in our forecasts for 2010 and 2011.
The revised forecasts indicate that the output gap will not close soon, supporting disinflation
even when policy rates are kept at low levels for an extended period. It is worthy to note that
the sharp fall in inflation in the first half of 2009 created significant base effects. This would,
ceteris paribus, lead to volatility and some mild increases in annual inflation rates until
mid2010 (Figure 35). Afterwards, as the impact of tax hikes and price adjustments would
gradually disappear, inflation is expected to trend downwards starting from the second half of
2010, stabilizing around 5 percent over the medium term. It is critical to note that inflation
would be less persistent, and thus economic recovery much smoother, should economic
agents take these forecasts as a benchmark in their pricing decisions.
It should be emphasized that any new data or information regarding the inflation outlook may
lead to a change in the monetary policy stance. Therefore, I would like to underline that the
assumptions on the future policy rates underlying the inflation forecast should not be
perceived as a commitment on behalf of the CBRT.
4. Risks
Distinguished Members of the Press,
In the last part of my presentation, I would like to mention the risks with respect to the
inflation outlook in the upcoming period and provide some information pertaining to the
probable monetary policy strategy should these risks materialize.
Although recent data releases indicate that the worst is over, concerns regarding the health
of the global economy remain. In particular, ongoing problems in credit and labor markets
keep the downside risks for global activity on the agenda. Should the global conditions
deteriorate again and consequently delay domestic recovery, the CBRT would consider
another cycle of rate cuts.
The fact that the crisis itself and policy responses are unprecedented in recent history poses
risk to the inflation and monetary policy outlook. It is impossible to benefit from past
experience in gauging the impact of recent global monetary policy measures on economic
activity and other fundamental variables. Although not having resorted to explicit quantitative
easing in the post-crisis period eliminates some of the risks in case of Turkey, it should still
be noted that the full impact of the cumulative easing of 1000 basis points since November
2008 is yet to be seen. In other words, although the baseline scenario does not envisage any
policy rate hikes for an extended period, it is important to closely monitor the impact of
policies to ensure a timely response to any development not envisaged within the framework
I drew in my assessments above.
Another possible scenario is a surge in capital inflows to emerging markets owing