Erdem Başçi: Recent economic and financial developments in Turkey
Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the
press conference for the presentation of the January 2013 Inflation Report, Ankara,
29 January 2013.
* * *
Distinguished Guests,
Welcome to the press conference held to convey the main messages of the first Inflation
Report of the year. Today I will talk about recent global and domestic developments besides
the CBRT's inflation forecasts that are accordingly updated. I will now present an overview of
the report, which will be published on our web-site shortly.
The Report typically summarizes the economic outlook underlying monetary policy decisions,
shares our evaluations on macroeconomic developments and presents our medium-term
inflation forecasts which were revised in view of the developments in the last quarter, along
with our monetary policy stance. In addition to the main text, the Report includes nine boxes
entailing significant and up-to-date analyses on various topics. For instance, one of these
boxes presents an analysis on the level of credit growth rate which will prove reasonable and
healthy for Turkey in the period ahead. Moreover, there is a summary of two papers
examining the effects of the CBRT's latest policies on the expectations and volatility of the
foreign exchange rate. In the Report, there are also analyses on the current account balance,
global risks, accounting of inflation forecasts, tax adjustments on the tobacco products and
the sensitivity of tax revenues on the economic circumstances. Titles of the boxes are shown
on the slide. I strongly recommend that you read these boxes, which will be published on our
web-site shortly.
Now, I would like to convey the main messages of the report. Firstly, I will touch upon the
global economy and then move on to the monetary policy.
The last quarter of 2012 was marked by an improvement in the risk appetite (Chart 1).
Concrete steps taken towards the resolution of the Euro area problems as well as the
favorable news regarding the US and Chinese economies were the leading developments
that fed into the risk sentiment. On the other hand, quantitative easing policies were
sustained amid the persisting sluggish growth outlook in advanced economies. Continued
monetary easing at a global scale accompanied by increased risk appetite led to an
acceleration in portfolio flows towards emerging economies (Chart 2). We are of the opinion
that all these developments once again highlighted the importance of a flexible monetary
policy framework.
Chart 1. Chart 2.
Global Risk Appetite Portfolio Flows to Emerging Economies
(Billion USD)
Source: Credit Suisse, Bloomberg. Source: CBRT.
1. Monetary policy and monetary conditions
In this period of extraordinary global circumstances, the policy framework designed by the
CBRT plays a great role in confining the adverse impacts of global shocks in Turkey.
Particularly the year 2012 was marked by the fruitful implementation of our policy mix.
Persisting global imbalances notwithstanding, we witnessed a healthier outlook composition
of growth besides a more evident rebalancing process. As illustrated in the slide, the current
account continued to improve (Chart 3) and the contribution of net exports to growth
displayed a surge (Chart 4). I would like to put special emphasis on the contribution of both
exports and imports, which proved positive, highlighting the effectiveness of the measures
taken.
Chart 3. Chart 4.
Current Account Balance Contribution of Net Exports to Annual GDP Growth(Percent)
(12-Month Cumulative, Billion USD)
Source: TurkStat, CBRT. Source: TurkStat, CBRT.
The year 2012 was not only a year of rebalancing but also a period of important achievements
on the price stability front. Inflation trended downwards throughout the year and fell by
4.3 percentage points year-on-year. Moreover, medium-term expectations showed a
remarkable improvement for the first time after a protracted period (Charts 5 and 6).
Chart 5. Chart 6.
Inflation and Uncertainty Band 12- and 24-Month Ahead CPI Expectations*
(Annual Percent Change)
Source: TurkStat, CBRT. * CBRT Survey of Expectations. Second survey period results for the pre-2013 period.
Source: CBRT.
Having started to achieve the intended results regarding inflation and rebalancing, monetary
policy has adopted a more accommodative stance since mid-2012. In this respect, the CBRT
lowered its average funding rate gradually since June by increasing the liquidity injected to
the market (Chart 7). Improved risk appetite and more effective use of the Reserve Options
Mechanism (ROM) have allowed a gradual reduction in the upper bound of the interest
corridor since September. Meanwhile, the liquidity provided for the market was further
increased, driving overnight market rates close to lower bound of the corridor.
Chart 7.
Policy Rate and Liquidity Policies
(Percent)
Source: ISE, CBRT.
Capital inflows accelerated at the year-end upon the surge in global risk appetite coupled
with a relative improvement in risk perceptions regarding Turkey. This contributed to a
fasterthan-expected credit growth and appreciation pressures on the Turkish lira. I suppose you
remember that we stated this as a possible risk scenario in the previous Inflation Report and
listed possible measures we could take. Upon the materialization of these risks to a large
extent, we launched the strategy we envisaged. In order to contain the risks on financial
stability, the appropriate policy response would be to keep interest rates at low levels while
sustaining macroprudential measures. In this respect, the policy rate and the corridor have
recently been shifted down and a measured tightening has been implemented through
reserve requirement policy.
Despite the cut in short term interest rates, the CBRT maintained its cautious and flexible
stance, which is worth noting. Thus, I would like to reiterate that the impact of the measures
taken on credit, domestic demand and inflation expectations will be closely monitored and
the amount of the Turkish lira funding will be adjusted in either direction, as needed.
Chart 8. Chart 9.
Yield Curve* 2-Year Real Interest Rates for Turkey*
(Percent) (Percent)
*Calculated from the compounded returns on bonds quoted at the ISE Bonds and Bills Market by
* Calculated as the 2-year discounted bond returns derived from the yield curve, minus the
using ENS method.
24month ahead CPI nflation expectations from the CBRT's Survey of Expectations.
Source: CBRT, ISE.
Source: ISE, CBRT.
Market interest rates plummeted in the last quarter due to improved risk appetite besides the
liquidity policies pursued by the CBRT. Meanwhile, the decline in long term rates proved
more notable. As a consequence, yields shifted down across all maturities while the yield
curve flattened in the interreporting period as illustrated in the slide (Chart 8). Real interest
rates also plunged since the fall in nominal interest rates was more significant than that in
inflation expectations. Although having crept up recently, real rates still stand at ever-low
levels (Chart 9).
Bank lending rates also remained on a downward track in the last quarter amid eased
external financing conditions alongside our liquidity policy. Consumer loan rates maintained a
downward trend in line with the market interest rates. Moreover, the fall in corporate loan
rates became more significant in the final quarter of the year owing to the cuts in the upper
bound of the corridor (Chart 10). What is more, tightening in the credit supply conditions for
corporate lending receded in this period (Chart 11).
Chart 10. Chart 11.
TL Loan Rates Commercial Loan Standards*
(4-Week Average, Percent) (Net Change)
Source: BRSA, CBRT.
* Banks are requested to state the change in the demand for credit. Net percentage change of
indexed responses indicates the direction of the change in credit demand. The index is calculated
as [the sum of percentages for (Increased Somewhat + Increased Considerably)] - [the sum of
the percentages for (Decreased Somewhat + Decreased Considerably)] +100. Index values
greater than 100 signify increase in credit demand.
Source: CBRT.
As a result of these developments, credit growth gained pace in the last quarter of the year
(Chart 12). Accordingly, annual rate of growth in total credit stock materialized around
16 percent at the end of the year, slightly higher than the 15 percent benchmark level for the
medium term (Chart 13). Total credit growth proved robust in early 2013, and the uptrend of
13 weeks in credit volume stood close to the past years' average.
Chart 12. Chart 13.
Loan Growth Rates Annual Growth Rate of Loans
(Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (Percent)
Source: CBRT. Source: CBRT.
There is a risk of further acceleration in credit in the forthcoming period. Financial conditions
index continued to ease with rapid capital inflows, improving credit supply conditions, and
accommodative liquidity policy (Chart 14). This outlook necessitates a cautious stance
against macro financial risks. Given these evaluations, I would like to remind that in its first
monthly meeting of 2013, the Committee highlighted the faster-than-expected credit growth
and signaled that macroprudential measures might be continued should this trend persist.
Chart 14.
Financial Conditions Index
* For further details on financial conditions index, see CBRT Economic Notes No. 12/31 and Report 2012-IV, Box 5.2.
Source: CBRT.
2. Macroeconomic developments and assumptions
Now, I will talk about the macroeconomic outlook and our assumptions which constitute the
basis for our forecasts. First, I will summarize the recent inflation developments, and then
compare the short term forecasts in the October Inflation Report with the actual year-end
inflation data in 2012. Then, I will continue with the domestic and foreign demand outlook.
Consumer inflation undershot the forecasts in the last quarter of 2012 and stood within the
uncertainty band (3-7 percent) with 6.2 percent at the year-end (Chart 15). This
lower-thanenvisaged inflation rate was mainly driven by the developments in unprocessed food prices,
which were stated to pose downside risk on inflation in the October Inflation Report.
Meanwhile, core inflation indicators were broadly consistent with expectations.
Chart 15.
October 2012 Inflation Forecasts and Realizations
(Percent)
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: TurkStat, CBRT.
Cumulative effects of the previous year's exchange rate and import price movements
gradually waned. Coupled with the ongoing slowdown in domestic demand, this led to a
sustained fall in the annual rate of increase in core goods prices. Meanwhile, prices of
services remained on a mild track (Chart 16). Against this backdrop, core inflation indicators
maintained a downward trend (Chart 17).
Chart 16. Chart 17.
Prices of Core Goods and Services Core Inflation Indicators SCA-H and SCA-I
(Annual Percent Change) ( Annual Percent Change)
Source: TurkStat. Source: TurkStat.
Now, I will touch upon the developments in economic activity on which the inflation forecasts
are based besides the short term outlook. Third-quarter national income data point that
domestic demand conditions remained weak due to private investment demand. Private
consumption, which displayed an increase for the first time in a protracted period, limited the
slowdown in final domestic demand. Nevertheless, demand conditions followed a slightly
weaker course compared to the projections in the October Inflation Report (Chart 18).
Last-quarter data indicate a mild pick-up in consumption and investment demand as
envisaged. Accordingly, output gap forecasts regarding the second half of 2012 are slightly
revised downwards compared to the previous report.
Chart 18.
2012Q3 Final Domestic Demand: Forecast and Realizations
(Seasonally Adjusted, 2008Q1=100)
Source: TurkStat, CBRT.
Meanwhile, we estimate that easing financial conditions due to the recent rise in capital
inflows may result in a higher-than-expected growth in final domestic demand in the first half
of 2013. Indicators for orders, loans and other leading indices also support this outlook.
Accordingly, we based the projections on a stronger domestic demand outlook for the first
half of 2013 compared to the previous reporting period.
On the other hand, external demand remains subdued. This period did not see a notable
change in global growth projections; hence there was no significant revision in
exportweighted global growth index (Chart 19). Accordingly, our forecasts are based on an outlook
that entails a mild increase in exports driven by market and product diversification as in the
previous report.
Chart 19.
Export-Weighted Global Economic Activity Index*
(2008Q2=100)
* For methodology, see Inflation Report 2010-II, Box 2.1 "Foreign Demand Index for Turkey".
Source: Bloomberg, Consensus Forecasts, CBRT.
In short, in line with the developments in domestic and external demand, the contribution of
aggregate demand conditions to disinflation is envisaged to be larger in the second quarter
of 2012; but smaller at the start of 2013 compared to the previous report. Overall, given the
lagged effects on inflation, I would like to state that the revision in the output gap did not
bring about a noticeable effect on the end-2013 inflation forecast.
As you all know, food, energy and import prices also play a great role in inflation forecasts.
Therefore, before moving on to forecasts, I will briefly talk about our assumptions regarding
these variables.
The outlook for import prices did not exhibit a notable change in the interreporting period
(Chart 20). The assumption for average oil prices for 2013, which was USD 107 in the
October Inflation Report, was slightly revised upwards to USD 108 in line with the futures
prices. Due to the favorable course of non-energy import prices, we revised our assumption
for import prices slightly downwards in the interreporting period (Chart 20). However, I would
like to underline that this revision did not bring about a noticeable effect on the inflation
forecast for 2013. Meanwhile, the assumption for the annual rate of increase in food prices
was preserved at 7 percent as it was in the previous report. In other words, we assumed that
the favorable course of unprocessed food prices in 2012 would come to a halt in the
forthcoming period.
Chart 20.
Revision in Oil and Import Price Assumptions
Oil Prices* (USD/bbl) Import Prices* (USD, 2003=100)
* Shaded region indicates the forecast period. * Shaded region indicates the forecast period.
Source: Bloomberg, CBRT.
Source: TurkStat, CBRT.
Before moving on to projections, I will dwell on our assumptions about the public finance.
Developments in the fiscal policy and tax adjustments in the last three months were broadly
consistent with the assumptions laid down in the October Inflation Report. Effects of the
adjustments in tobacco products on inflation in January proved to be as expected.
Furthermore, the year-end budget balance was consistent with the targets revised in the
Medium Term Program (MTP).
Medium term projections are based on the assumption that no additional tax adjustments will
be introduced to tobacco and energy products in the rest of the year. On the other hand, I
would like to mention that other tax adjustments and administered prices are assumed to be
consistent with inflation targets and automatic pricing mechanisms.
Regarding the fiscal outlook, medium-term inflation forecasts take the revised projections of
the MTP as given. Accordingly, it is assumed that fiscal discipline will be preserved and the
structural budget balance will not display a notable change in the forthcoming period. Thus,
there has been no change in end-2013 inflation forecast stemming from fiscal policy.
Thus, I can say that assumptions underlying inflation forecasts and external conditions were
broadly kept unchanged.
3. Inflation and monetary policy outlook
Now, I would like to present our inflation and output gap forecasts based on the outlook I
have described so far. I would like to remind you that medium term forecasts assume that
monetary policy decisions are data dependent. Accordingly, we envisage that credit and
exchange rates follow a stable course and aggregate demand conditions are kept at levels
that do not exert upside pressures on inflation. In other words, we based our forecasts on an
outlook where risks arising from the recent surge in capital inflows risks are contained.
When forming our forecasts, we assumed that annual loan growth rate would hover around
15 percent and there would be no significant change in the real effective exchange rate.
Accordingly, inflation is expected to be, with 70 percent probability, between 3.9 and
6.7 percent (with a mid-point of 5.3 percent) at the end of 2013, and between 3.1 and
6.7 percent (with a midpoint of 4.9 percent) at the end of 2014. We expect inflation to
stabilize around 5 percent in the medium term (Chart 21).
Chart 21.
Inflation and Output Gap Forecasts
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
In sum, we maintained inflation forecast for end-2013 at 5.3 percent, as there has been no
major revision in the factors affecting inflation outlook in the past three months.
We expect inflation to resume its downward trend after creeping up in January due to
tobacco price adjustments. Although inflation may increase temporarily in May and June due
to base effects in energy prices, it will continue to decline in the following months, closing the
year at 5.3 percent (Chart 21). We expect core inflation indicators to display a steady
downward path and materialize below 5 percent at the end of the year.
Revisions in our inflation forecasts are presented on the slide. Although there was no change
in the end-year inflation forecast, we revised our inflation forecasts downwards compared to
the path presented in the October Inflation Report in the short term due to the benign course
of unprocessed food prices (Chart 22).
Chart 22.
Comparison of October 2012 and January 2013 Inflation Report Forecasts
Output Gap Forecasts
Inflation Forecasts
Source: TurkStat, CBRT. Source: CBRT.
The same slide presents the revision in the output gap forecasts. We revised the output gap
upwards for the first quarter of 2013 due to recent acceleration in capital inflows and credit
growth. However, we assumed that the policy measures would drive the output gap and
credit path closer to the October forecast in the second half of the year.
We can summarize the main message of the forecast regarding the monetary policy as
follows: a cautious monetary policy stance should be maintained to keep inflation close to the
target at the end of 2013. It is important that the CBRT does not disregard excessive volatility
in credit and exchange rates, for macro financial risks to be contained. It should be kept in
mind that keeping credit growth at healthy and reasonable levels will support both price
stability and financial stability. In fact, notwithstanding the recent faster-than-expected growth
in credit, we envisaged that credit growth would hover around 15 percent.
I would like to once more underline that any new data or information regarding the inflation
outlook may lead to a change in the monetary policy stance. Therefore, assumptions
regarding the monetary policy outlook underlying our inflation forecasts should not be
perceived as a commitment on behalf of the CBRT.
In addition to these forecasts, alternative scenarios on the inflation outlook and the global
economy are discussed in the Risks section of the Inflation Report. You can examine the
Report for details.
While concluding my remarks, I would like to thank all my colleagues, who contributed to the
Report, primarily those at the Research and Monetary Policy Department as well as the
members of the Monetary Policy Committee, and thank every one of you for your
participation.