Erdem Başçi: Latest economic outlook and macroeconomic
developments in Turkey
Panel speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at
the Conference on "Policy responses to commodity price movements", Istanbul, 7 April 2012.
* * *
Distinguished Guests,
The global economic developments observed during the last decade are influential on the
commodity prices. Some of these developments were real factors directly affecting the
supply and demand of these commodities. On the demand side, significant growth in
demand for energy, food and raw materials of developing countries, led by China and India,
became an important factor in commodity markets in recent years. Likewise, the discrepancy
between the paces of recovery of developed and developing countries in the aftermath of the
global crisis and the global monetary expansion are observed to have reflections on the
demand for commodities.
The increasing income in developing countries enjoying robust growth broadly decreases the
price sensitivity of commodity demand. As a result of production capacity shortfalls of
exporting countries in the short run and these countries' reluctance to increase their
production capacity, prices sometimes display excessive increases in the event of a setback
in supply.
On the other hand, the robust economic growth potential of developing countries implies that
the demand for raw materials will continue to be strong also in the medium term. The key
solution for imports-dependent countries due to having little natural resources lies in
increasing the productivity in agriculture and energy sectors. Increases in productivity
especially in the agricultural sector are of vital importance and thus call for prompt action for
the developing countries that are witnessing a shift in employment from agriculture to
nonagriculture sectors. In a similar sense, measures for achieving more effective use of energy
by companies and households, and for increasing the use alternative energy sources,
especially renewable energy, should be the another issue among the priorities on the part of
both advanced and developing countries, dependent on imported energy inputs.
Esteemed Participants,
A comprehensive literature has been guiding central bankers as to the type of monetary
policy responses to be given to commodity price changes. The central banks following to the
widely accepted advice put forth by this literature endeavor to contain the second-round
effects of the commodity price increases, rather than the first-round effects. It is inevitable for
commodity price increases to be reflected directly on prices, because of the high weight of
goods linked to energy and other commodities in consumer price indices. That is why the
first-round effects cause fluctuations in inflation. Nevertheless, temporary movements in
commodity prices, unless they affect the general pricing behavior, do not affect the
mediumterm outlook, but just remain as relative price changes. That is why those central banks
pursuing monetary policy with a medium-term perspective prefer to refrain from sharp policy
responses to the abovementioned first-round effects.
Understanding the sources of the price fluctuations prior to making decisions is a prerequisite
for policy makers. Commodity price changes with relatively more of a permanent nature may
distort the general pricing behavior and initiate a wage-price cycle. This may entail prolonged
upward movement in inflation in general and, accordingly, the high costs associated with this.
Therefore, to be able to contain the potential second-round effects due rises in commodity
prices, it is important for central bankers to pay close attention to core inflation indicators and
inflation expectations, and shape their communication policy in this direction.
We, as the Central Bank of the Republic of Turkey (CBRT), are also in the position to carry
out the abovementioned analyses. As a matter of fact, in our Inflation reports as well as the
Summary of the Monetary Policy Committee (MPC) meetings, we share with the public, our
assessment of the nature of commodity price changes.
In the Inflation Report published in January 2012, we made the following assessment on oil
prices:
"Another risk factor in the forthcoming period is the uncertainty regarding oil prices. Although
the weak course of the global economy dampens commodity prices, recent manifesting
problems regarding oil supply pose upside risk to energy prices. Should such a risk
materialize, the CBRT will not react to temporary price movements, yet the Bank will not
tolerate any deterioration in expectations."
Likewise, at the Monetary Policy Committee meeting held on 27 March; after pointing out that
"uncertainties in oil prices pose upside risks to the inflation outlook", we underscored "[...] we
will continue to closely monitor supply-side developments and we will not tolerate any
deterioration in inflation expectations".
In view of the current level of inflation, I would like to re-underline on this occasion that it is
essential to eliminate upside risks. To this end, last month, we implemented a "strong,
effective and temporary" monetary tightening in order to eliminate the impact of recent cost
developments on inflation expectations. We will closely monitor factors affecting inflation in
the forthcoming period and additional monetary tightening (AMT) will be repeated when
deemed necessary.
Dear Participants,
At this point, I would like to give you a quick overview on the monetary, financial and fiscal
policies that Turkey has implemented for economic stability. The global demand shock that
came after Lehman crisis brought steep declines in commodity prices with it. In response,
expansionary monetary policy as well as supportive fiscal and financial policies were
implemented at the same time. In terms of monetary policy, interest rate cuts and injection of
liquidity into the markets, and in terms of fiscal policy, temporary cuts in consumption taxes
could be mentioned as examples of the overall accommodative policy stance in Turkey in
20091.
With the help of these policies, the dynamics of the economy in Turkey turned to positive in
2010; however, the increase in foreign capital inflows due to the exceptionally loose
monetary policies by the advanced economies led to an excessive credit growth and an
appreciation pressure on the Turkish currency, widening the external deficit. In response to
these developments that have repercussions on the current account and the financial
stability, CBRT responded by widening the overnight interest rate corridor with the aim of
deterring short-term foreign capital inflows. Additionally, as part of the restrictive fiscal and
financial policies, macroprudential measures were implemented in collaboration with other
regulatory institutions and fiscal discipline was strengthened through tax hikes.
When we come to 2011, Euro area debt crisis took over the markets; however, commodity
prices displayed an upward trend as the global monetary expansion and its effects on the
markets still continued. Decreasing risk appetite led to capital outflows from developing
economies. As the increasing energy prices and the pass-through from the depreciating
currency started to put excess pressure on the consumer price inflation, CBRT responded
this time with AMT complemented with measures relaxing the financial markets' liquidity
needs. On the fiscal front, cuts in wage and corporate income taxes differentiated across
regions have been put in place last week to support the economy that is already growing at a
moderate pace.
Dear Participants,
So far I have touched on the impacts of movements in commodity prices on inflation and
economic growth. Now I will talk about the impact of fluctuations in commodity prices on
foreign trade balances. The dependency of the Turkish economy on energy imports makes
the current accounts balance more sensitive to changes in commodity prices. Uncertainties
regarding the global economy in recent years and the exceptionally loose monetary policies
adopted by advanced economies, such as the United States, Japan and the Euro Area,
foreshadow the high probability of continued excess volatility in commodity prices.
In the face of these developments, we welcome the recent concrete steps, as part of the
medium term program in Turkey, towards reducing the dependence on energy imports by
shifting to domestically produced and renewable energy sources. These measures will
hopefully ease the susceptibility of the current account to commodity prices in the long run.
The key question in the short-run is how to smooth out the impact of the commodity prices on
the domestic economy in the short to medium term, while there is a heightened degree of
uncertainty regarding financial and real factors. In Turkey, ex-refinery fuel prices, in addition
to the 18 percent-Value Added Tax (VAT), are also subject to the Special Consumption Tax
(SCT). Special Consumption Tax, which is not only a fixed tax but also comprises a major
part of the final prices of fuel products, helps to smooth out significant fluctuations in crude oil
import prices. Thus, consumers are less affected by such fluctuations.
Esteemed Guests,
It seems that uncertainties regarding commodity prices will continue to be an important factor
to be considered carefully in policy implementations in the forthcoming period, too. I believe
that the papers presented in this conference will guide us in overcoming the policy
challenges we will face along the road. Thank you very much for your interest and
participation.