Durmuş Yılmaz: Recent economic and financial developments in Turkey
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, 30 April 2009.
* * *
Distinguished Guests and Members of the Press,
Welcome to the press conference for the presentation of the April 2009 Inflation Report, one
of the most important communication tools of the inflation-targeting regime.
The report typically elaborates global and domestic macroeconomic developments and
presents the medium-term inflation forecasts revised in line with the previous quarter
developments. It also presents six boxes examining the recent monetary policy decisions
and the relevant economic developments.
Now, I would like to give you a short summary of our evaluations and the Central Bank's
revised inflation forecasts in the Inflation Report, which will be posted on the CBT website
today.
1. Inflation developments
Distinguished Members of the Press,
The world economy has been undergoing a period dominated by dynamics quite unlike to
those of previous years. With the loss of confidence resulting from the on-going financial
crisis, the global economy entered a significant contraction trend after a long period of time.
Impacts of the crisis on real economic activity deepened in the first quarter of 2009. Thus,
inflationary pressures, which were perceived as a major concern until the last quarter of
2008, were overtaken by fears of deflation in developed countries in the first quarter of 2009.
In this context, I would like to start my speech by once more underlining that inflation
developments in Turkey in the first quarter of 2009 should be considered in the light of these
global conditions.
In the first quarter of 2009, consumer prices increased by 1.05 percent and annual consumer
inflation became 7.89, remaining within the limits of the uncertainty band. Backed by the
significant slowdown in economic activity and improvement in cost-based effects, the decline
in inflation gained ground and spread across all subgroups. In addition, the short-term
exchange rate pass-through on consumer prices remained limited in the previous quarter.
The contribution of all main groups excluding tobacco and gold, which posted high-rated
price hikes to annual inflation weakened in the first quarter of the year. While the contribution
of food and energy to annual inflation decreased especially due to the marked decline of
annual inflation in energy prices, the contribution of services prices also continued to
diminish owing to the fall in costs and the slowdown in domestic demand (Figure 1).
Figure 1: Contribution to Annual CPI Inflation
14
Tobacco and Gold**
Food and Energy*
12
Services Basic Goods
10
8
6
4
2
0
03 05 07 09 11 01 03 05 07 09 11 01 03
07 07 07 07 07 08 08 08 08 08 08 09 09
* Food and Energy: Food, non-alcoholic beverages and energy
** Tobacco and Gold: Alcoholic beverages, tobacco products and gold.
Source: TURKSTAT, CBT.
In the first quarter, the increase in food prices lost pace over previous years in response to
the significant slowdown in the processed food group and energy prices dropped owing to
the lagged effects of the recent decline in oil prices. Goods prices excluding food and energy
slumped by a lower margin over the first quarter of the previous year. The slowdown in
services prices became more pronounced (Figure 2).
Figure 2: CPI Sub-Groups
(First Quarter Percentage Change)
10
2007 2008 2009
8
6
4
2
0
-2
-4
Goods excluding Food
Food Energy Services
and Energy
Source: TURKSTAT, CBT.
The unprocessed food group posted monthly price hikes of significant levels in the last
quarter of 2007 and the first half of 2008 on account of production losses and cyclical
developments all over the world. Annual inflation in this group surged to 25 percent. With the
reversal of these effects since the second half of 2008, the downward trend in annual
inflation of this group gained pace in this quarter (Figure 3). Meanwhile, the downward trend
in the annual rate of increase in food prices is expected to continue in the second quarter as
well.
Figure 3: Food Prices
(Annual Percentage Change)
27
Processed Food
24
21
Unprocessed Food
18
15
12
9
6
3
0
-3
03 04 05 06 07 08 09 10 11 12 01 02 03
08 08 08 08 08 08 08 08 08 08 09 09 09
Source: TURKSTAT, CBT.
Esteemed Guests,
I would like to further clarify the developments related to services prices as I deem it helpful
to focus on them to better understand the significant downturn in the underlying trend of
inflation. Services inflation, which had remained relatively elevated in the first three quarters
of 2008 due to the second round effects of energy and food prices, has eased considerably
since the last quarter of 2008 following the sharp contraction in aggregate demand. The
cumulative rate of change in services prices during first three months of 2009 was merely
0.53 percent on lower costs and weaker domestic demand, which is the lowest percentage
recorded in the 2003 based CPI index's history.
The slowdown in the growth rate of services prices has spread across all services subgroups
(Figure 4). The lagged effects of dips in international oil prices had a favorable impact on
transport services in the first quarter. Rental price movements remained quite below the
averages of previous years due to the contraction of domestic demand. The prices of the
restaurants and hotels group also followed a similar course owing to shrinking demand and
decelerating food prices (Figure 5). I would particularly like to draw attention to the decrease
of annual rent inflation. Seasonally adjusted data point to a continual and accelerating
downward trend in rents in the first quarter of the year. The slowdown in services prices is
expected to continue in the upcoming period as well.
Figure 4: Services Prices Figure 5: Services Prices
(Annual Percentage Change) (First Quarter Percentage Change)
6
Other Services
Transportation Services
21 2006-2007 Average 2008 2009
Rent 5
Restaurants and Hotels
18
4
15
3
12
2
9
1
6
0
3
-1
0
-2
03 05 07 09 11 01 03 05 07 09 11 01 03
Other Transportation Rent Restaurants
07 07 07 07 07 08 08 08 08 08 08 09 09
Services Services and Hotels
Source: TURKSTAT, CBT. Source: TURKSTAT, CBT.
The first quarter saw a significant decline in the prices of durables excluding gold (Table 1).
While the said decline was mainly driven by the SCT (Special Consumption Tax) reduction
on automobiles, white goods and electronic products to be effected for a limited period of
three months from March onwards, automobile prices, by displaying sharp decline, were
chief determinants in prices of this group. The favorable effect of these reductions started to
be observed on the domestic sales of automobiles and household goods in March (Figure 6).
Moreover, the temporary VAT cut on furniture and IT products for a three-month period will
have a short-term restraining effect on annual inflation in durables. Nevertheless, the lagged
effects of the exchange rate pass-through on the prices of durable goods are expected to be
partially seen following the depletion of current inventories.
Table 1. Prices of Durable Goods
(Quarterly and Annual Percentage Change)
2008 2009
I II III IV Annual I
Durable Goods
1.58 2.81 -1.80 0.61 3.19 -2.49
(excl. gold)
Furniture 4.13 7.60 -1.27 -1.31 9.17 -3.17
Electric and
nonelectric 1.16 0.68 0.12 6.04 8.13
appliances -4.26
Automobiles 1.04 2.44 -3.63 -2.30 -2.56 -1.36
Other 0.04 0.89 1.02 2.27 4.29 0.36
Figure 6: Domestic Sales of Automobiles
(Seasonally Adjusted, Quantity)
45000
40000
35000
30000
25000
20000
15000
0307 0507 0707 0907 1107 0108 0308 0508 0708 0908 1108 0109 0309
Source: TURKSTAT, CBT.
Core inflation indicators displayed a continual and accelerating downward trend in the first
quarter of 2009. The CPI index excluding energy, unprocessed food, alcoholic beverages,
tobacco products and gold fell by 2.66 percentage points year-on-year, while, with a further
exclusion of processed food, the index dropped by 1.41 percentage points year-on-year.
Even though the SCT cut in the second half of March was also influential in this
development, the ongoing decline in the seasonally adjusted rates of change in both indices
points to a continuing downward trend in inflation (Figure 7).
Figure 7: Special CPI Aggregates H* and I*
(Seasonally Adjusted, Monthly Increases, 2-Month Average)
1.4
H* I*
1.2
1.0
0.8
0.6
0.32
0.4
0.2
0.21
0.0
0305 0605 0905 1205 0306 0606 0906 1206 0307 0607 0907 1207 0308 0608 0908 1208 0309
* SCT adjusted H and I series
Source: TURKSTAT, CBT.
Distinguished Members of the Press,
As I mentioned at the beginning of my speech, economic stagnation, which grew more
widespread in late 2008 and the first quarter of 2009, accompanied by the fall in international
commodity prices has led to a significant decline in global inflation. As illustrated in the slide,
the downward trend in consumer price inflation in developed markets became more
pronounced, while inflation in emerging markets lost ground significantly.
Annual consumer price inflation in developed markets declined from 4.4 percent in July 2008
to 0.7 percent in February 2009. Concurrently, consumer price inflation in emerging
economies dropped from 9.9 percent to 6.4 percent as of the same period (Figure 8 and 9).
Figure 8: Consumer Price Inflation in Figure 9: Consumer Price Inflation in
Developed Markets Emerging Markets
(Annual Percentage Change) (Annual Percentage Change)
6
10
8
4
6
2
4
0 2
0106 0606 1106 0407 0907 0208 0708 1208
0106 0606 1106 0407 0907 0208 0708 1208
Source: Bloomberg, CBT. Source: Bloomberg, CBT.
2. Monetary policy response
Distinguished Members of the Press, Dear Guests,
After making brief remarks on inflation developments, now I would like touch on the policies
pursued by the Central Bank in this period.
As I mentioned earlier in my speech, the first quarter of 2009 is characterized as a period
where impacts of the global financial crisis on the real economy were felt more clearly and
inflationary pressures that dominated a major part of 2008 have been overtaken by fears of
deflation and growth. With the effect of commodity price declines and slumps in domestic
economic activity since mid-2008, inflation in Turkey took a sharp plunge in this period.
Waning inflationary concerns have allowed the Central Bank to focus on restraining the
potentially devastating effects of the crisis on the Turkish economy without conflicting with
our primary objective of maintaining price stability. Considering the policies that have been
implemented since the second half of 2008 within this context assumes great importance.
Recent data point to an ongoing slowdown in economic activity of the first quarter of the year.
Although domestic demand showed signs of a limited recovery over the previous quarter, it
still maintains its weak course. Labor market data also indicate that this downward trend will
continue and that it will take some time for economic activity to recover. Slumps in
commodity prices and the significant slowdown in foreign demand in this period also add to
the downward trend of inflation. Within this framework, the Central Bank adopted a strategy
of front-loading policy easing by cutting overnight rates by a total of 700 basis points from
November 2008 to April 2009 (Table 2).
Table 2: Monetary Policy Committee (MPC) Decisions in 2008 and
2009
MPC Meeting Dates Decision on Interest Interest Rate
Rates (Percentage
points)
17 January 2008 -0.25 15.50
14 February 2008 -0.25 15.25
19 March 2008 No change 15.25
17 April 2008 No change 15.25
15 May 2008 +0.50 15.75
16 June 2008 +0.50 16.25
17 July 2008 +0.50 16.75
14 August 2008 No change 16.75
18 September 2008 No change 16.75
22 October 2008 No change 16.75
19 November 2008 -0.50 16.25
18 December 2008 -1.25 15.00
15 January 2009 -2.00 13.00
19 February 2009 -1.50 11.50
16 April 2009 -0.75 9.75
Source: CBT.
Benchmark bond rates came down significantly driven by the policy rate cuts and the partially
easing tensions in global financial markets (Figure 10). Moreover, the signal given by the
Central Bank for possible necessity of maintaining downward flexibility for a long period of
time coupled with moderate recovery in risk perceptions contributed to the decline in market
interest rates.
Figure 10: Interest Rate Developments (Percent)
ISE Bills and Bonds Market Interest Rate (Benchmark, Compounded)
27
25
CBRT Overnight Interest Rate (Compounded)
23
21
19
17
15
13
11
9
05 07 09 11 01 03 05 07 09 11 01 03
07 07 07 07 08 08 08 08 08 08 09 09
Source: ISE, CBT.
Sharp decline in inflation arisen from deepened global financial turbulence-related
developments allowed both developed and developing countries to make substantial cuts in
policy rates (Figures 11 and 12).
Figure 11: Policy Rates in Developed Figure 12: Policy Rates in
Countries InflationTargeting Developing Countries
5 14
13
4
12
3
11
10
2
9
1
8
0
7
0104 0604 1104 0405 0905 0206 0706 1206 0507 1007 0308 0808 0109
0104 0604 1104 0405 0905 0206 0706 1206 0507 1007 0308 0808 0109
Source: Bloomberg, CBT Source: Bloomberg, CBT
Distinguished Guests,
The financial crisis that erupted in the markets of developed countries deepened starting
from September 2008, influencing the global financial system as a whole. This led to
tremendous hikes in the risk premia of developing countries. In general, countries with low
credit ratings end up with more apparent deterioration in risk premia, whereas the opposite
applies to Turkey. In this period, being among developing countries having the lowest credit
ranking, the decline in Turkey's risk premium was somewhat limited. In other words, Turkey's
risk premium has resisted the deterioration in global risk perceptions more than is implied by
her credit rating, thus clearly differing it from other developing countries in terms of the
riskpremium-credit rating relationship (Figure 13). This indicates that traditional criteria used in
determining credit rating and credit risk level may remain inadequate for accurately reflecting
actual credit risk levels of countries at the times during which country specific characteristics
come to the forefront.
Figure 13: Relation Between CDS Rates and Credit Ratings
270
Hungary
Indonesia
Russia
220
09)
170
Apr
S. Korea
CDS
13 Mexico
in
-
Poland
Colombia
08
120 Brazil
S. Africa
Czech Rep.
Change
Sep Chile
(12 70
Turkey
20
0 2 4 6 8 10
S&P Credit Ratings (1=A+, 9=BB-)
Source: Bloomberg, CBT.
Countries that experienced a decline in their risk premia enjoyed room for policy rate cuts in
the period of deepening financial crisis (Figure 14). In this period, contrary to many
developing countries, the foreign exchange indebtedness of households in Turkey remained
at low levels. This factor, accompanied by the resilience of the financial system and the
restricted deterioration in risk premia during the global financial crisis, allowed the Central
Bank of the Republic of Turkey to opt for policy rate cuts of large amounts.
Figure 14: Decisions on Interest Rates and Changes in Risk
Premia
(as of 16 April 2009)
300
Hungary
250
Indonesia
200
S. Korea
CDS
Mexico
in 150
Poland
Colombia
Brazil
rep.
S. AfricaCzech
100
Chile
Change
50
Turkey
0
-7.5 -6.5 -5.5 -4.5 -3.5 -2.5 -1.5 -0.5 0.5 1.5
Change in Policy Rates (%)
Source: Bloomberg, CBT.
Distinguished Guests,
The measures taken against the global financial crisis were not limited to policy rate cuts. In
this period, a lot of countries not only take measures to regulate the functioning of the
markets, but also exercise non-traditional monetary policy implementations. In this period,
the Central Bank of Turkey also took measures against the potential adverse effects on
financial stability, a prerequisite for price stability. In the first quarter of 2009, a
countercyclical monetary policy was adopted in the money market on the one hand and a number of
decisions were made to regulate the Foreign Exchange and Banknotes Markets-Foreign
Exchange Deposit Market on the other hand. In this framework, the maturity of foreign
exchange deposit borrowed by the Banks from the Central Bank was extended; the lending
rate for transactions, which the Central Bank is a party to, was reduced and the maturity of
interbank transactions in the said market was extended. Besides, foreign exchange selling
auctions were held at the times of ailing price movements in the foreign exchange market. In
addition to these measures, the conditions for the Liquidity Support Facility offered to banks
under extraordinary conditions were revised.
Now, I would like to once more underline that if problems in international markets further
deepen and adversely affect domestic financial markets, the Central Bank will continue to
take additional measures and to employ other policy instruments.
Esteemed Guests,
Inflation expectations displayed a downward trend in the first quarter of 2009 in line with
decelerating inflation. As the incoming information on inflation and economic activity
confirmed our forecasts and vindicated the CBT's monetary policy decisions, inflation
expectations also responded favorably following a low course in the second quarter of 2009.
Though inflation expectations for every term fall compared to the previous Inflation Report
period, the decline in short-term inflation expectations appears to be more evident since April
2009 (Figures 15 and 16).
Figure 15: 12 and 24-Month Ahead* CPI Figure 16: Inflation Expectations Curve*
Expectations
(Annual Percentage Change)
(Annual Percentage Change)
10
10
January
9
April
9
Inflation Target
8
6.86
8
7.55
7
6.71
6 7
6.45
6.45
5
6 6.61
4
5
24 Months
3 12 Months
4
2
01 04 07 10 01 04 07 10 01 04 07 10 01 04 01 05 09 01 05 09 01 05 09
06 06 06 06 07 07 07 07 08 08 08 08 09 09
09 09 09 10 10 10 11 11 11
* Second survey term expectations of the CBT * Constructed through the linear interpolation method
Expectations Survey. by employing the inflation expectations of various
terms in the CBT Expectations Survey. Second
Source: CBT.
survey term expectations of the CBT Expectations
Survey.
Source: CBT.
3. Inflation and monetary policy outlook
Distinguished Guests,
After summarizing inflation and monetary policy developments in the first quarter of 2009, in
this part of my speech, I would like to share with you the evaluation of the Central Bank of
Turkey about the inflation outlook and monetary policy in the upcoming period. I will also add
the Central Bank's inflation forecasts presented in the Inflation Report, which is to be posted
on our website soon. Firstly, I will briefly touch on the economic framework underlying these
forecasts.
In spite of all the measures taken to alleviate its effects on the financial system and economic
activity, no clear indication yet to signal that the global crisis is coming to an end. Within this
context, challenges regarding the emerging markets' access to global capital still persist and
the risk premium indicators of these countries remain highly elevated despite the limited
rebound observed at the end of the first quarter of 2009 (Figure 17).
Figure 17: Risk Premium Developments
5 Year CDS Spreads
41
900
(29.06.2007=1)
EMBI+
36
800
Turkey
Turkey
EMBI+
31
700
Brazil
26
600
S. Africa
21
500
Hungary
16
400
S. Korea
11
300
6
200
1
100
06 10 02 06 10 02
12 03 06 09 12 03 06 09 12 03
07 07 08 08 08 09
06 07 07 07 07 08 08 08 08 09
Source: Bloomberg.
In the first quarter of 2009, the Turkish lira did not widely differentiate from the currencies of
other developing countries in terms of changes in value. Having said that, the relatively low
level of volatility in the Turkish lira - one of the currencies with the highest volatility
historically and susceptibility to the global risk appetite - became more evident in 2009, the
year during which the distinctive characteristics of the countries came to the forefront (Figure
18).
Figure 18: Exchange Rate Developments
2.1 1000
FX Volatility
0.04
TL/Exhange Rate Basket
900
2
(0,5 Euro+0,5 US Dollar)
0.035
Brazil Czech Rep.
800
EMBI+Turkey (right axis)
Hungary Mexico
1.9
0.03
Poland S. Africa
700
S. Korea N. Zealand
0.025
1.8
600
Chile Turkey
0.02
500
1.7
0.015
400
1.6
0.01
300
1.5
200 0.005
1.4 100
0
01 04 07 10 01 04 07 10 01 04
03 06 09 12 03 06 09 12 03 06 09 12 03
07 07 07 07 08 08 08 08 09 09
06 06 06 06 07 07 07 07 08 08 08 08 09
Source: Bloomberg and CBT.
The expectation that the global capital squeeze will not end in the upcoming period indicates
that the potential pressure on the exchange rates of developing countries may persist.
Tightness in financial conditions continued in the first quarter of the year. Prolonged
uncertainties pertaining to the global economy accompanied with deceleration in economic
activity kept the banks' lending appetite at low levels. The elevation in credit risk, the decline
in foreign financing facilities and the short maturity of deposits urged banks to be cautious in
terms of credit supply and curbed the decline in credit interest rates. In spite of a limited
rebound in credits recently, we believe there is little chance for this move to become a
permanent recovery as long as the global economy is not stabilized (Figure 19).
Figure 19: Commercial and Consumer Loans
(4 Week Moving Average, Percent)
1.5
1
0.5
0
-0.5
-1
Commercial Credits Consumer Credits
-1.5
01 02 03 04 05 06 07 08 09 10 11 12 01 02 03
08 08 08 08 08 08 08 08 08 08 08 08 09 09 09
Source: CBT.
Distinguished Members of the Press,
In the first quarter of 2009, the sharp contraction in global economic activity and its larger
than anticipated impact on domestic activity called for a downward revision of the outlook for
aggregate demand developments from the previous reporting period. In the January Inflation
Report, economic activity was expected to display a significant decline in the last quarter of
2008, while it was anticipated that the speed of contraction would start to lose pace during
the first quarter of 2009. In line with expectations, the Gross Domestic Product (GDP)
displayed a sizeable drop in the last quarter of 2008 on a quarterly and on an annual basis
(Figures 20 and 21). Recent readings suggest that economic activity will display a
sharperthan-envisaged slowdown and that the contraction in the economy in the first quarter of the
year will register double-digit figures. This development was the main reason underlying the
downward revision in the outlook for inflation and monetary policy in the last three months.
Figure 20: Quarterly GDP Growth Rate Figure 21: GDP
(Percent) (Seasonally Adjusted Fixed Prices of 1998,
Billion TL)
27
12
9.4
10
8.4
7.3
6.9
6.8
8
6.2
25
5.3
4.7
6
2.8
4
1.2
1.1
2
23
0
-2
21
-4
-6
-5.7
-6.2
-8
19
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2000 2002 2004 2006 2008
2008-2 2008-4
2004 2005 2006 2007 2008
Source: TURKSTAT. Source: TURKSTAT, CBT.
An analysis of Gross Domestic Product developments in terms of output in the last quarter of
2008 reveals that all the subcomponents except those of the agriculture sector contributed
negatively to growth. A comparison of this financial crisis with that in 2001 points to a
similarity between not only the Gross Domestic Product growth rate, but also the composition
of production sectors (Figure 22). On the other hand, making the said comparison also in
terms of expenditures is crucial considering the projections pertaining to the timing of the
possible rebound in economic activity. To this end, we believe that it will be useful to exclude
the quarterly additional contribution of public expenditures in the last quarter of 2008 and
focus on other components. Firstly, excluding public sector demand, the difference in growth
in the two periods compared exhibits a fairly unfavorable outlook for the last quarter of 2008.
The relatively high depletion in inventories in this period compared to that in 2001 reveals the
relative strength of the aggregate demand shock and the sharpness of the downturn in
capacity utilization rates. Moreover, the differentiation in private consumption demand and
net exports performance indicates a rather lower contraction of domestic demand besides
the adverse effect of the global shock on net foreign demand in the current period (Figure
23).
Figure 22: Contribution to Growth by Figure 23: Contribution to Growth by
Output Expenditures
(Percentage Points) (Percentage Points)
1 10 9,1
0,4
8
0
2001-2
-0,2 5,0
6
-1 -0,6
2008-4
-0,7 -0,8
-0,9
4
-2
2
0,7
0,7
-2,3
-2,4
-2,5
-2,6
-3
0
-0,1
-4
-2
-2,1 -2,1
-5 2001-2
-4 -3,2
-4,0
2008-4
-6
-5,4
-6
-5,7 -5,5
-6,2
-6,3
-6,2
-6,3
-8
-7
GDP Private Private Public Public Stock Net Export
GDP Agriculture Indsutry Construction Services Net Tax
Consumption Investment Consumption Investment Change
Source: TURKSTAT. Source: TURKSTAT.
Turkey's export performance has become more vulnerable to global cyclical changes in
recent years as the share of durables and capital goods in our exports has increased over
time. In fact, the significant slowdown in our major trading partners and the consequent
contraction in exports were among the determinants of the sharp downturn in aggregate
demand. Therefore, the assumptions on the global economy with respect to the inflation and
monetary policy outlook presented in the Inflation Report that will be posted on our Website
shortly are very important.
The impact of the global financial turmoil in the corporate sector has become more evident
and global growth has significantly contracted. The credit crunch in international credit
markets still persists and there is yet to be a notable improvement in global economic
indicators. Our baseline scenario in the January Inflation Report envisaged a gradual
recovery in the global economy as of early 2010. On the back of the deepening global
financial turmoil in the past period, many international institutions revised their growth
forecasts for 2009 and 2010 downwards by a significant margin (Table 3). The forecasts for
global economic activity, which were revised in the last three months, indicate a sharper
contraction for 2009 compared to our forecasts presented in the January Inflation Report and
a slower and more gradual recovery throughout 2010. Within this framework, compared to
the previous report, the revised forecasts are based on a deeper contraction in 2009, and a
global recovery that will be visible by mid-2010, rather than at the beginning of 2010. I would
like to clarify that the word "recovery" in this Report refers to "a significantly positive growth in
economic activity in year-on-year terms".
Table 3: Forecasts for Annual Growth
2009 2010
Previous Forecast New Forecast Previous Forecast New Forecast
IMF
World 0,5 -1,3 3,0 1,9
Developed Countries -2,0 -3,8 1,1 0,0
USA -1,6 -2,8 1,6 0,0
Eurozone -2,0 -4,2 0,2 -0,4
Developing Countries 3,3 1,6 5,0 4,0
OECD
Total OECD -0,4 -4,3 1,5 -0,1
USA -0,9 -4,0 1,6 0,0
Eurozone -0,6 -4,1 1,2 -0,3
Consensus Forecasts
World -0,2 -2,1 2,0 1,9
USA -1,8 -2,7 2,3 1,8
Eurozone -1,4 -3,4 0,8 0,3
Source: IMF World Economic Outlook, January and IMF World Economic Outlook, April.
OECD Economic Outlook, 2008/II, December and OECD Economic Outlook, Interim Report, March.
Consensus Forecasts, January and Consensus Forecasts, April.
The contraction in economic activity in the last quarter of 2008, which was mainly driven by
the contraction in the export-oriented industrial sector, accelerated the deterioration in
nonagricultural employment and unemployment climbed to a record high with the additional
effect of the significant rise in the labor force participation rate (Graph 24 and 25). The most
recent data indicate that the rise in the unemployment rate continued with further
acceleration in the first quarter of 2009. Within this framework, it is estimated that the current
conditions will continue to curb the upward trend in unit labor costs and the rise in domestic
demand.
Graph 24: Non-Agricultural Employment Graph 25: Non-Agricultural Unemployment
(Seasonally Adjusted, Million People) (Seasonally Adjusted, Percent)
16.5 16
16.0
15
15.5
14
15.0
13
14.5
14.0 12
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 4 1 2 3 4 1 2 3 4
2005 2006 2007 2008 2004 2005 2006 2007 2008
Source: TURSTAT, CBT. Source: TURKSTAT, CBT.
The rapid policy rate cuts coupled with the fiscal stimulus plan designed to revive domestic
economic activity are expected to underpin domestic demand as of the second quarter of
2009. As I have mentioned earlier in my speech, reaching lasting stability in the global
economy will take time and therefore, no notable recovery is expected in domestic economic
activity in the short run. Within this framework, aggregate demand conditions are expected to
continue to support disinflation for some time (Graph 26). In sum, compared to the January
Inflation Report, the revised inflation forecasts are based on increased favorable contribution
from aggregate demand conditions to disinflation.
Graph 26: Output Gap
(Percent)
8
6
4
2
0
-2
-4
-6
-8
-10
00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
Q1 Q3 Q1 Ç3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
Source: CBRT.
The problems in global economy and tighter credit conditions still persist. Following recent
financial measures and policy rate cuts, domestic demand is expected to gain a relatively
stable trend in the second quarter of 2009 and growth is expected to generate positive rates
as of the final quarter of 2009. Meanwhile, considering the current global economic outlook, it
is estimated that access to foreign financing facilities will remain limited for a while, economic
agents will continue their cautious stance and no significant pick-up will be observed in
aggregate demand in the short run. Moreover, when the sharp decline in non-agricultural
employment is taken into account, it is estimated that the level of disposable income will
remain low for a while and the precautionary saving tendency will continue to curb domestic
demand. Within this framework, we believe that the recovery in economic activity will be
gradual and the downward pressures on inflation will continue.
Despite the downward revision in the outlook for economic activity, there have been no major
developments that require revising the oil and food price assumptions stated in the past
Report. Therefore, the forecasts have been based on a framework in which oil prices would
hover around USD 55 per barrel throughout the forecast horizon. The previous assumptions
for oil prices at 55 USD per barrel, and food inflation of 7.5 percent for 2009 and 6 percent
thereafter are maintained.
Distinguished Members of the Press and Dear Guests,
In line with the framework that I have presented so far and based on the assumption that
there will be measured policy rate cuts in the short run and after that policy rates will be kept
constant for a while, our revised forecasts suggest that with 70 percent probability, inflation
will be between 4.8 percent and 7.2 percent (mid-point 6.0) at the end of 2009, and between
3.5 percent and 7.1 percent (mid-point 5.3) at the end of 2010. We expect inflation to come
down to 4.9 percent by the end of 2011 (Graph 27).
Graph 27. Forecasts for Inflation and Output Gap
Forecast Range* Output Gap (Base Scenario)
Uncertainty Band for 2009
End-Year Inflation Targets
12
10 Control
Horizon
8
6
4
2
0
Percent
-2
-4
-6
-8
4 1 2 3 4 1 2 3 4 1 2 3 4 1
2008 2009 2010 2011 2012
*Indicates a 70-percent confidence interval for the forecast
To sum up, the sharp weakening in aggregate demand has not only led to
faster-thanenvisaged rate cuts, but has also required a downward revision in the medium-term inflation
forecasts. The revised forecast suggests that the recent rate cuts have lowered the
probability of significantly undershooting the end-year inflation target. However, given the
tightness in financial conditions and the absence of clear signs of recovery in the global
economy, it may be necessary for monetary policy to maintain an easing bias for a
considerable period.
It should be emphasized that any new data or information regarding the inflation outlook may
lead to a change in monetary policy stance. Therefore, I would like to repeat once again that
the assumptions on future policy rates underlying the inflation forecast should not be
perceived as a commitment on behalf of the Central Bank of Turkey.
4. Risks and alternative scenarios
Distinguished Members of the Press,
I would like to devote the last part of my speech to the risks to monetary and inflation policy
in the upcoming period, as well as the alternative projections that we mentioned in our
Inflation Report within this framework.
Currently, developments in the global economy are influencing the monetary po