Durmuş Yilmaz: Inflation in Turkey - an overview
Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the press
conference for the presentation of the Inflation Report, Ankara, 28 April 2006.
* * *
Dear Press Members, Distinguished Guests,
The second issue of the Inflation Report, the leading communication means of the Inflation Targeting
regime, which was put into effect as of January 2006, has been published on the web site of the
Central Bank of Turkey today.
As repeatedly emphasized in our previous presentations and press releases, the impacts of monetary
policy decisions on the economy manifest themselves during a certain period. In this context, on the
way to achieve pre-announced inflation targets, central banks should analyze the developments that
will affect the medium-term tendency of inflation and release inflation forecasts based on these
analyses at certain periods within the framework of the inflation targeting regime. In the event of a
remarkable deviation from the promulgated forecasts, explaining the reasons for such a deviation and
the policy measures that should be taken to general public via inflation reports is of special importance
under the transparency and accountability principles.
In this framework, the Central Bank published its first Inflation Report, which includes inflation
forecasts and the analyses related to the economic outlook that lies behind the said forecasts in
January 2006. With this report, the Central Bank, has, at the same time, shared with the public how it
interprets the economic outlook with respect to inflation and monetary policy.
In this context, the second issue of the Inflation Report evaluates general macroeconomic
developments so as to shed light on the likely tendency of inflation in the medium-term and, compare
and contrast the updated assumptions on macroeconomic variables with those of the previous Inflation
Report. The forecasts produced on the basis of the said assumptions are also shared with the public.
In addition to all of this, the likely risks that may lead to an apparent downward or upward deviation in
inflation forecasts are also explicated in the Report.
Content of the Inflation Report
Distinguished Guests,
The Inflation Report consists of six chapters.
In the first chapter, macroeconomic developments are summarized in the light of data released in the
first quarter of 2006. The outlook for the supply-demand balance, productivity developments,
international liquidity conditions and the risk premium, which are the determinants of the tendency of
inflation in the medium-term and the inflation forecasts produced in compliance with this outlook also
appear in the first chapter. Since it is considered that the control horizon of monetary policy involves a
timeframe of one and a half years as in the previous Inflation Report, forecasts are presented so as to
cover the remaining three quarters of 2006 and the first three quarters of 2007.
Moreover, the outlook regarding the course of the factors that pose risk to achieving the inflation
target, which are outside the area of impact of monetary policy is summarized in the introduction
section and the likely policy reaction against such risks is discussed. These risk factors are listed as
the course of oil prices, housing price increases, the acceleration in price increases of those items,
which are determinant in the inflation of the goods group, such as fresh fruits, oil, basic metals and
gold, global risk appetite and international liquidity conditions.
Detailed analyses of developments in inflation, supply-demand, the financial sector and public finance,
which have been examined within the framework of the information they contain relating to the
medium-term tendency of inflation are presented in the following four chapters.
In the last chapter of the Inflation Report, updated assumptions on fundamental macroeconomic
variables are compared and contrasted with the assumptions of the previous Inflation Report and
inflation and the output gap forecasts produced on the basis of these assumptions are analyzed.
Furthermore, the likely risks that may lead to an apparent upward or downward deviation in inflation
forecasts are explicated in detail.
In this Inflation Report, a number of boxes have been prepared in order to shed light on certain
subjects of interest as in the previous Report. For instance, the impacts of differentiation in productivity
ratios in the tradable and non-tradable sectors compared to the Euro zone on relative prices and real
exchange rate behavior in the process of convergence with the European Union are analyzed in one
of the boxes. Moreover, in addition to the box in which international gold prices and the impacts of
these on the CPI are analyzed, the Report also contains a box in which the targets and realizations
relating to inflation and Net International Reserves are evaluated within the context of IMF
conditionality.
Distinguished Guests,
After this general overview, I would like to summarize the evaluations and the inflation forecasts of the
Central Bank in the latest Report, which will be published on our web site today.
Inflation developments
In the first quarter of 2006, the fall in inflation displayed a slowdown tendency in line with our
predictions in the previous Inflation Report and the annual rate of increase in consumer prices was
realized as 8.16 percent as of the end of March 2006. This slowdown stems from the base effect
created by the price increases that have realized at historically very low levels due to the reduction in
the Value Added Tax (VAT) rates of food, health and education items made in early 2005 (Graph 1).
Graph 1. End-year Inflation Target and Annual CPI Inflation
(Percentage Change)
35
Annual Inflation Target
30
25
20
15
10
5
0
Jan-03 Jan-04 Jan-05 Jan-06
Sep-03 Sep-04 Sep-05
May-03 May-04 May-05
Source: TURKSTAT.
However, the sole reason for the realization of inflation above the path consistent with the end year
inflation target in the first quarter of the year is not the said base effect. When the contribution of
subitems to first quarter inflation is analyzed, it is observed that the course of prices of unprocessed food
products, which increased beyond expectations, tobacco products and services played a leading role
in the said rise. Nevertheless, high-rated seasonal discounts in clothing prices due to demand and
competitive conditions limited the increase in consumer price inflation (Graph 2).
Graph 2. The Contribution of Sub-items to First Quarter Inflation
(Point)
1.41
1.5
2005 2006
1.0
0.64
0.51
0.39
0.30 0.31
0.5
0.26
0.20
0.21
0.06
0.04
0.01
0.0
-0.5
-1.0
-1.36
-1.18
-1.5
Food and Alcoholic Tobacco Clothing and Housing Restaurant Other
Bev. Footwear and Hotels Subgroups
Nonalcoholic
Bev.
Source: TURKSTAT, CBRT.
Dear Guests,
Classifying goods and services group, price increases in goods group gained pace, while the services
group inflation declined, except rents item, in the first quarter of 2006.
Along with energy prices, the prices of unprocessed food products, which increased significantly in the
first quarter of 2006, compared to the same period of the previous period, became the determinant in
the rise in prices of the goods group (Graph 3).
Graph 3. Prices of Goods (Quarterly Percentage Change)
2005 Q1 2006 Q1
10
8.81
8
6
3.61
4
2.63
1.86
1.73
2
0.80
0
-0.24
-2
-4
-3.04
Goods Energy Unprocessed Food Durable Goods
(Exc. Gold)
Source: TURKSTAT, CBRT.
The developments in services group prices indicate that the prices in restaurant and hotel services as
well as transportation prices remained considerably below the rates of increase of the same period of
the previous year. Nevertheless, annual inflation rates in services, which are referred to as 'labor
intensive services' and whose prices cannot be directly managed and are not directly influenced by
energy prices, have followed a stable course in the past year. Moreover, the realization of price
increases in rents at almost the same rates of the previous year due to the lack of immediate housing
supply against increasing housing demand in the first quarter of 2006 also points to the unfavorable
impact of the said prices on consumer prices throughout the year. In this context, demand
developments towards services and productivity developments are being carefully monitored and we
maintain our scrutiny of these developments (Graph 4).
Graph 4. Prices of Services (Quarterly Percentage Change)
7.87
8
2005 Q1 2006 Q1
7
6
5.19
5
4.26
4.08
3.85
4
3.02
3 2.41
1.80
1.75
2
1.27
1
0
Services Rent Transportation Restaurant and Other Services
Services Hotels
Source: TURKSTAT, CBRT.
Analyzing the course of prices in durable consumption goods, excluding gold prices, that have
continued their high-rated upward trend within the framework of developments in international
markets, the annual rate of increase of the said prices entered a downward trend as of August and this
trend continued to accelerate in the first quarter of 2006. A reverse in the tendencies of both furniture
prices, which may be an indicator of consumption demand and prices in the electrical and
nonelectrical devices group, including technology-intensive goods open to competitiveness in general and
susceptible to the exchange rate developments as well, are major determinants of this trend (Graph
5).
Graph 5. Prices of Durable Goods (Excluding Gold)
(Annual Percentage Change)
20
15
10
5
0
-5
Durable Goods (Excl. Gold)
-10
Furniture
-15 Electrical and Non-electrical Equipments
-20
Jul-04 Jul-05
Jan-04 Jan-05 Jan-06
Sep-04 Sep-05
Mar-04 Mar-05 Mar-06
Nov-04 Nov-05
May-04 May-05
Considering the fact that seasonal price movements are determinant in consumer prices, it will be
helpful to analyze the Special CPI Aggregates (SCA), excluding seasonal products, with respect to the
course of inflation.
The decline in the annual rate of increases in the SCA-E* index that has been continuing since the
beginning of 2005, which is calculated by excluding seasonal products from the SCA-E index -
excluding energy, alcoholic beverages and tobacco products, had slowed down by the first quarter of
2006. On the other hand, it is observed that the downward trend in the seasonally adjusted SCA-D*
index, which is calculated by excluding energy, unprocessed food, alcoholic beverages, tobacco
products and gold, continued in the first quarter of the year as well and the main trend of inflation was
downwards (Graph 6).
Graph 6. CPI and Special CPI Aggregates (E* and D*)
(Annual Percentage Change)
10
9
8
7
6
CPI
E*
5
D* (Seasonally Adjusted)
4
Jul-05
Jan-05 Jun-05 Jan-06
Feb-05 Sep-05 Oct-05 Feb-06
Apr-05 Dec-05
Mar-05 Aug-05 Nov-05 Mar-06
May-05
E*: CPI excluding energy, alcoholic beverages, tobacco products and seasonal
products
D*: CPI excluding energy, alcoholic beverages, tobacco products, unprocessed
food and gold
Source: TURKSTAT, CBRT.
Producer prices rose by 2.48 percent in the first quarter of 2006. The Producer Prices Index, which is
calculated by excluding tax, indicates that manufacturing industry prices, comprising a significant part
of the index, have become more susceptible to raw material prices and exchange rate developments
compared to previous years (Graph 7).
Graph 7. Manufacturing Industry Prices and Exchange Rate Basket
(0,5 USD + 0,5 Euro) (Annual Percentage Change)
Manufacturing Industry Prices
20
Exchange Rate Basket
10
0
-10
-20
Jul-04 Jul-05
Jan-04 Jan-05 Jan-06
Sep-04 Sep-05
Mar-04 Nov-04 Mar-05 Nov-05 Mar-06
May-04 May-05
Source: TURKSTAT, CBRT.
The sector, in which the said effect is clearly perceived within the PPI, is the petroleum products sector
that is subject to high taxes. Excluding the said effect, the annual rate of increase in manufacturing
industry prices is maintaining its low-level trend, albeit its slight upward tendency (Graph 8).
Graph 8. PPI and Manufacturing Industry Prices Excluding
Petroleum Products (Annual Percentage Change)
12
Manufacturing Industry Prices
Excluding Petroleum
PPI
9
6
3
0
Jul-05
Jan-05 Jun-05 Jan-06
Feb-05 Sep-05 Oct-05 Feb-06
Apr-05 Nov-05 Dec-05
Mar-05 Aug-05 Mar-06
May-05
Source: TURKSTAT, CBRT.
Distinguished Guests,
Inflation expectations are determinant on inflation realizations in view of being the basis for both
pricing behavior and wage adjustments. Therefore the developments in these expectations play an
important role in Central Bank analyses and evaluations. In this framework, analyzing the inflation
expectations for the next 12 months and 24 months as of April, the following points emerge:
Though consumer inflation expectations for the next twelve months have declined, the rate of decline
has been slowing down significantly since February and expectations have to some extent been
following a horizontal course. The fact that long-term consumer expectations relating to the next 12
and 24 months are slightly above the targets is interpreted as a development that requires prudence
with respect to the falling inflation process. Nevertheless, the course of longer-term expectations at
low levels is an encouraging development as regards the success of inflation targeting (Graph 9).
Graph 9. CPI Expectations Regarding Next 12 and 24 Month
Periods
(Annual Percentage Change)
9
Next 12-Month
8
Next 24-Month
7
6
5
4
3
Jun-05
Feb-05 Oct-05 Feb-06
Dec-04 Apr-05 Dec-05 Apr-06
Aug-05
Source: CBRT.
Supply and demand developments
Supply-demand balance
Distinguished Guests,
At this point, I would like to touch on our evaluations relating to supply and demand developments in
the light of national income data released at the end of March.
In the last quarter of 2005, Gross Domestic Product (GDP) increased by 9.5 percent compared to the
same period of the previous year. Hence, GDP growth was realized as 7.4 percent throughout 2005.
The ongoing structural reform process along with the implementation of tight monetary and fiscal
policies have enabled the strengthening of economic fundamentals, characterized as a decline in the
risk premium, reduction in real interest rates and appreciation of the New Turkish lira (YTL) against
foreign currencies, which have been the main determinants of rapid growth in the total domestic
demand in 2005. Within this framework, total final domestic demand increased by the high rate of 19.1
percent in the last quarter of 2005 compared to the same period of the previous year. Analyzing by
quarterly periods, seasonally adjusted data also point to an ongoing rapid growth tendency in total
final domestic demand in the last quarter of 2005 (Graph 10).
Graph 10. GDP and Total Final Domestic Demand
(Seasonally Adjusted)
40000
38000
36000
34000
32000
30000
28000
26000
24000
03-I 03-II 03-III 03-IV 04-I 04-II 04-III 04-IV 05-I 05-II 05-III 05-IV
Total Final Domestic Demand GDP
Source: TURKSTAT, CBRT.
Analyzing by demand components, total consumption and total investment expenditures made a high
contribution to GDP growth by 5.8 and 5.7 percentage points, respectively. While private investment
expenditures maintained both its machinery-equipment and construction investment-originated growth
trend in the last quarter of the year, public expenditures provided an investment-based support to
economic growth during the same period. Accordingly, both public and private-sector-originated high
increases in total investment expenditures are still continuing (Graph 11). The index produced by the
aggregation of indicators relating to investments also points to an ongoing upsurge in
machineryequipment investments (Graph 12). Moreover, the high-rated increase in long-term credit use from
abroad during the January-February period compared to the same period of the previous year
indicates that investment-originated growth prevailed in the first quarter of 2006 as well (Annex Graph
1).
Graph 11. Fixed Capital Investments Graph 12. Private Sector Machinery-Equipment
(Annual Percentage Change) Investments and Investment Index (MBYAT)
70
8000 104
Public Private Total
60 7000
102
6000
100
50
5000
98
40
4000
96
3000
30
94
2000
92
20 1000
0 90
10
1997- 2000- 2003-
1997-I 2000-I 2003-I 2006-I
1999-II 2002-II 2005-II
0 1998-III 2001-III 2004-III
Private Sector Machinery-Equipment Investment (Constant
-10
pricesseasonally adj.)
-20
MBYAT (Left axis)
04-I 04-II 04-III 04-IV 05-I 05-II 05-III 05-IV
Source: TURKSTAT, CBRT.
Despite rapid growth in the total final domestic demand and the GDP, the current production tendency
signifies a level that does not impose any pressure on prices. Hence, estimates for the output gap
indicate that recent trend in economic growth does not pose a threat with respect to inflation (Graph
13). The factors underlying this evaluation can be listed as follows: (i) Analyzing the supply-side
sources of growth, continuance of productivity gains, which is a key element of non-inflationary growth,
enables the reduction in unit labor costs, thus restricts the impact of the rises in other costs. (ii) The
demand-side sources of growth points to an increasing share of investments in the GDP. The ongoing
strong growth trend in investment expenditures limits inflationary pressures through its support for the
increases in partial labor productivity via capital deepening. Accordingly, the composition of domestic
demand secures the simultaneous achievement of rapid growth and disinflation. (iii) Although the
strong position of the YTL against foreign currencies is a factor that supports domestic demand
growth, it restricts the impact of rapid growth on prices not only by its direct effect on prices but also by
stimulating investment demand, which in turn induces productivity gains.
Graph 13. Output Gap (Percent)
6
4
2
0
-2
-4
-6
-8
-10
00-I 01-I 02-I 03-I 04-I 05-I 06-I
00-III 01-III 02-III 03-III 04-III 05-III
Source: CBRT.
Despite the fact that the recent data provide signals for an ongoing strong course of domestic
demand, within the framework of non-inflationary rapid growth analysis explained above, the output
gap is expected to support the disinflation process in the first half of 2006 as well. Nevertheless, our
view that the contribution of supply-demand conditions to the disinflation process has diminished is still
valid.
Foreign demand
The current account, which was USD 15.6 billion in 2004, reached USD 23.1 billion in 2005, realizing
6.4 percent of the GNP (Graph 14). The upward trend in the current account deficit continued in the
first two months of 2006.
Graph 14. Current Account Balance/ GNP
(Annualized, Percentage)
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
00-I 03-I
99-II 02-II 05-II
98-III 01-III 04-III
00-IV 03-IV
Source: CBRT.
In 2005, while the rates of increase of both exports and imports weakened compared to 2004, the rate
of increase in exports remained well below the rate of increase in imports in the second half of the
year. The said tendency continued in the first two months of 2006 as well (Graph 15). The decline in
textiles and apparels exports on an annual basis since November 2005 has had an unfavorable
impact on general export performance. While rapid economic growth leads to an increase in the
imports of intermediary goods, the rises in oil prices boost the amount of imports infused terms.
Graph 15. Imports and Exports (*)
(Billion USD, Annual Percentage Change)
60
50
40
30
20
10
0
Jul-03 Jul-04 Jul-05
Mar-03 Nov-03 Jan-04 Mar-04 Nov-04 Jan-05 Mar-05 Nov-05 Jan-06
May-03 Sep-03 May-04 Sep-04 May-05 Sep-05
Imports Exports Exports (exc. textiles and apparels)
*Quarterly moving averages.
Source: TURKSTAT.
It is expected that the current account deficit will not pose any risk with respect to economic stability
and the inflation target in the short-term. Along with growth in the share of foreign direct investments
that have gained pace with privatization revenues, the increase in the share of long-term credits in the
credit composition of the banking sector and the private sector eases concerns about the sustainability
of the current account. It is predicted that foreign direct investments, which reached USD 8.6 billion in
2005 (2.4 percent of GDP), will prevail at high levels in 2006 as well due to the continuance of
privatization revenues and company acquisitions. Moreover, the process of convergence with the
European Union is expected to ensure the continuance of international capital's interest in Turkey.
Costs
While productivity rose at a high rate in the private manufacturing industry, real unit wages dropped by
8.2 percent compared to the same period of the previous year due to the decline in real wages (Graph
16). The persistence of the drop in real unit wages became one of the leading factors in the
continuation of the disinflation process.
Graph 16. Unit Real Wage Index in Manufacturing Industry
(1997=100)
125
115
105
95
85
75
65
55
98-I 99-I 00-I 01-I 02-I 03-I 04-I 05-I
98-III 99-III 00-III 01-III 02-III 03-III 04-III 05-III
Source: SPO, TURKSTAT and CBRT.
In 2006, in the event investments and employment in the manufacturing industry follow the same
course as the previous period, the continuance of productivity increases may be expected. Meanwhile,
the salaries of civil servants and minimum wage increases point to a rise in wages above inflation.
The unfavorable course in raw material prices, another significant component of costs, still persists.
Crude oil prices exceeded their historical peak figure experienced during Hurricane Katrina by the 25th
of April and reached USD 73.3 per barrel. OPEC's decision to leave its quota unchanged at its
meeting of the 8th of March, the low level of unused capacity in the sector and uncertainties about
leading oil producing countries such as Nigeria and Iran led to an increase in oil prices. Despite new
production capacities are expected to be introduced, the International Energy Agency's (IEA)
expectations for the growth trend in crude oil demand, which are above those of 2005, strengthen the
probability that oil prices will remain high throughout 2006. In the meantime, while the high global
growth tendency pushes metal prices upwards, the increase in the interest of investment funds to the
sector investment tools becomes the determinant in the upsurge in metal prices above expectations.
In the light of these developments, crude oil prices continue to be a risk factor with respect to inflation.
Graph 17. Chosen Indicators Relating to Crude Oil Prices
220 70
65
190
60
160 55
50
130
45
100 40
05-01 05-03 05-05 05-07 05-09 05-11 06-01 06-03
IMF-IFS Metal Price Index (2000=100), left axis
Import Unit value Index (2003=100), left axis
Crude Oil Prices (Brent, Barrel/USD), right axis
Source: IFS, TURKSTAT, Bloomberg.
Financial markets and financial intermediation
Distinguished Guests,
The course of international liquidity conditions and the risk premium in the first two months of the year
has been in favor of developing countries. In March, the favorable course in risk premium came to a
halt because of the deterioration in the global risk appetite and the increase in the perceptions of
uncertainty about the interest rates of the Bank of Japan. Nevertheless, the ongoing successful
conduct of budget performance became the most significant development that limited the tendency of
deterioration in expectations (Graph 18).
Graph 18. Indicators Relating to Risk Premium
JP Morgan EMBI+ Turkey Index
5 Year CDS Rates
1450
1100
1250
900
1050
850 700
650
500
450
300
250
50
100
27-Apr-03 27-Apr-04 27-Apr-05
27-Aug-02 27-Dec-02 27-Aug-03 27-Dec-03 27-Aug-04 27-Dec-04 27-Aug-05 27-Dec-05
Source: Bloomberg.
Interest rates remained unchanged in the first quarter of 2006. However, a reduction by 25 basis
points was made in April. The consistency of data relating to inflation and economic activity, which
were released in the first four months of the year, with Central Bank forecasts specified in the first
Inflation Report allowed us to act in compliance with the policy perspective that was shared with the
public.
The benchmark interest rate in the ISE, which has been realized under the overnight borrowing rate
since October 2005, displayed a slight increase in March due to the stagnation in interest rate
reductions, global liquidity conditions and domestic uncertainties (Graph 19).
Graph 19. The Developments in Interest Rates
31
ISE Bonds and Bills Market Interest Rates
29 (Benchmark, Compound Yield)
CBT O/N Interest Rate (Compound)
27
25
23
21
19
17
15
13
31-Jul-05
02-Jan-04 30-Jun-04 27-Jan-06
07-Feb-04 19-Apr-04 10-Sep-04 16-Oct-04 01-Feb-05 14-Apr-05 25-Jun-05 05-Sep-05 11-Oct-05
14-Mar-04 05-Aug-04 21-Nov-04 27-Dec-04 09-Mar-05 16-Nov-05 22-Dec-05 04-Mar-06
25-May-04 20-May-05
Source: ISE, CBRT.
Analyzing the yield curve that shows interest rates in the ISE with different maturities, the interest rates
have been realized at a lower level in each maturity as of 24 April 2006 compared to the end of the
previous year. This development stems from the expectations that the downward tendency in inflation
will continue in 2006 as well. Nevertheless, the more horizontal course of the longer maturity end of
the yield curves compared to the previous periods confirms the cautious attitude of economic agents
towards their future risk perceptions in the said period (Graph 20).
Graph 20. Yield Curves
30 September 2005
30 December 2005
24 April 2006
Rates
14.45
Interest
12.00
1 Month 2 Months 3 Months 4 Months 6 Months 9 Months 12 Months 18 Months
Months to Maturity
Note: Line 14,45 corresponds to the composite interest rate of the overnight interest
rate of 13.50.
Source: ISE.
BIS Review 67/2006 13
The stagnation in the downward tendency of the risk premium was reflected on the real interest rate as
well and real interest rates that are calculated by using benchmark securities interest rates and
twelvemonth ahead inflation expectations obtained from the CBRT Expectation Survey followed a relatively
horizontal course in the first quarter of 2006 (Graph 21).
Graph 21. Developments in Real Interest Rates
(According to ISE Benchmark Interest Rate and Twelve-Month
Ahead Inflation Expectations)
35
30
25
20
15
10
5
Jul-02 Jul-03 Jul-04 Jul-05
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05
Source: ISE, CBRT.
The appreciation of the New Turkish lira continued in the first two months of 2006. In March, however,
the New Turkish lira depreciated against the basket consisting of Euro and USD due to the rise in the
risk premium (Graph 22).
Graph 22. Exchange Rate Developments
YTL/Basket (0.5 Euro-0.5 USD)
Real Effective Exchange Rate (CPI Based)
1.85
180
1.75 170
160
1.65
150
1.55
140
1.45
130
1.35
120
1.25
110
1.15
100
Jul-02 Jul-03 Jul-04 Jul-05
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
2-Jan-02 2-Jan-03 2-Jan-04 2-Jan-05 2-Jan-06
2-Sep-02 2-Sep-03 2-Sep-04 2-Sep-05
2-May-02 2-May-03 2-May-04 2-May-05
Source: CBRT.
It is observed that the stability in YTL-denominated bond issues by foreign banks, an indicator of
demand for YTL, has a tendency to continue. In the first quarter of 2006, there was no remarkable
change in the maturity structure of current securities compared to the last quarter of the previous year
(Graph 23).
Graph 23. YTL-Denominated Bonds Issued by Foreign Banks
5,000
3500
4,500
3000
4,000
YTL)
3,500
2500
YTL)
3,000
(Million
2000
2,500
(Million
Issue
2,000
1500
of
1,500
1000
1,000
Amount
Amount
500
500
0
0
2005 2005 2005 2005 2006
2006 2008 2010 2012 2014 2016 2018 2020
1.Quarter 2.Quarter 3.Quarter 4.Quarter 1.Quarter
Quarter of Issue Year of Maturity
Source: CBRT.
Public finance
Distinguished Participants,
It is well known that developments in debt stock are of great importance with respect to managing the
expectations of economic agents and, thus, the course of the risk premium. In this framework, these
developments are closely monitored as regards monetary policy and inflation.
In the current period, the rate of increase in the debt stock slowed down significantly due to decreasing
interest payments and the high primary surplus and the downward tendency in the ratio of public debt
stock to GNP continued. It is observed that the same trend still continues even when parity and
exchange rate effects are excluded from the change in debt stock.
Additionally, it is considered that the structure of debt stock has become stronger against the risks in
the said period. Decreasing the susceptibility of debt stock towards exchange rates and limiting its
susceptibility to interest rates on one hand, and the risk reduction in debt roll-over owing to the
extension of the borrowing maturity and the strengthening of cash reserves on the other hand, are the
factors that support our mentioned assessment (Graph 24).
Graph 24. Public Debt Stock Indicators (Billion YTL)
Public Debt Stock Indicators The Analysis of the Change in the Central
Government's Overall Debt Stock
60
120 400
334.4
350
40
100
300
80
20
250
68.2
60 200
55.8
Percent
0
150
40
100
-20
2003 2004 2005 2006/03*
20
50
Parity Effect** 6.2 3.0 -4.8 0.7
0 0
-18.8 -4.6 -0.8 0.0
Exchange Rate
Effect***
2001 2002 2003 2004 2005
4.0 4.1 -0.6 0.7
Foreign Debt Net
2006/03
Increase
Central Government Total Debt Stock (Right axis)
48.8 31.2 21.1 1.4
Domestic Debt
Central Government Total Debt Stock/GNP
Net Increase
Total Public Net Debt Stock/GNP
* It shows the change compared to 2005.
** It shows the external debt changes resulting from movements in USD/Euro and USD/SDR parities.
*** It indicates the changes resulting from movements of New Turkish Lira against USD.
Note: It represents the growth in the net increase in debt stock excluded from exchange rate and parity effects. The parity
effect is calculated merely for the external debt. Each component of the change in debt stock is calculated as billion YTL.
The sum of components corresponds to the nominal change in the overall debt stock expressed in terms of YTL.
Source: Treasury, CBRT.
Medium-term forecasts
Current stance, short-term outlook and the assumptions
Current stance relating to real sector variables that constitute the basis for the forecasts presented in
the previous Inflation Report have been preserved in this Report to a great extent. Despite rapid
growth in domestic demand in the last quarter of 2005, the ongoing increase in the ratio of investment
expenditures to GDP eased the pressures on inflation imposed by the increase in demand by pushing
the production capacity upwards. Moreover, continuing productivity proceeds limited the increase in
costs, thus limiting the pressure on inflation. While producing forecasts, the short-term outlook relating
to domestic supply and demand conditions was developed in the light of these findings.
Real interest and real exchange rate variables, which determine the relationship of supply-demand
conditions to inflation and constitute the starting point of the monetary transmission mechanism, are
also significant components of the assumption set that constitute the basis for medium-term forecasts.
It is assumed that in the current situation, real interest rates are not at a level that can exert pressure
on credit increases and demand conditions. Nevertheless, under a main scenario in which the current
program will continue to be implemented, macro and political stability will not deteriorate, structural
reforms and, accordingly, long-term capital inflows as well as productivity increases will continue, it is
assumed that the New Turkish lira will retain its strong position and will continue to support the decline
in inflation.
In the first Inflation Report of 2006, it was foreseen that though the falling inflation process would enter
a stagnation period in the first quarter of the year, it would follow a downward tendency as of the
second quarter of the year, unless an unfavorable exogenous development happened. While the
reduction of VAT in the textile, ready-made clothing and leather sectors to 8 percent from 18 percent in
March was a development that reinforced the forecast that inflation would re-enter a downward
tendency in the second quarter of the year, rapid increases in oil prices in the recent period
forewarned that the said forecast should be handled cautiously. While producing forecasts, this
information was also added in the framework of the short-term outlook.
Besides, the price dynamics in services sector, mainly the rent sub-item, continue to play a critical role
with respect to achieving the year-end inflation target. Though the contribution of the rises in the rent
sub-item to 2006 inflation is forecasted to be about one point, a scenario, in which this periodic
pressure on CPI inflation will decreasingly persist throughout 2007, is considered.
Forecasts relating to fundamental macro variables of the Euro zone, such as interest rates, inflation
and growth, an