Durmuş Yilmaz: Press conference for the presentation of the Inflation
Report
Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at
the press conference presenting the third issue of the Inflation Report, Central Bank of the
Republic of Turkey, Ankara, 29 July 2009.
* * *
Distinguished Guests and Members of the Press,
Welcome to the press conference to convey the main messages of the July 2009 Inflation
Report, one of the most important communication tools of the inflation-targeting regime.
The report typically summarizes the economic framework addressed in monetary policy
decisions, elaborates global and domestic macroeconomic developments and presents the
medium-term inflation forecasts, which have been revised in view of the previous quarter
developments, along with the monetary policy stance.
As you know, in the summary of Monetary Policy Committee Meeting published yesterday
we pointed out that global interest rates are likely to remain at low levels for an extended
period, given the significant slowdown in growth and the increase in saving rates. We
therefore specified that this view should be emphasized more forcefully to align market yields
closer with future policy intentions.
In this framework, as a result of our evaluations with Committee members, we agreed that it
would be possible to provide more solid information regarding the policy stance in the
upcoming Inflation Report. Before presenting this information to you, I would like to give you
a summary of recent developments related to the factors affecting global and domestic
inflation.
1. Inflation developments
Distinguished Members of the Press,
The second quarter of 2009 was marked by persistence of the adverse effects of the global
financial crisis that erupted in developed markets and then spread across the world during
the last quarter of 2008. In this period, economic activity maintained its weak course despite
the counter-cyclical effects of fiscal and monetary policies implemented extensively in a
coordinated manner at global level so as to remedy the excessive shortage of liquidity in
markets. While recent data releases on the global financial system and economic activity
indicate that the worst may be over, improvements in leading indicators have been slow,
problems in credit markets linger, and employment remains in a precarious state, suggesting
that the recovery will be anemic and protracted.
The sharp contraction in aggregate demand and the fall in commodity prices since the last
quarter of 2008 has led to plummeting inflation rates all over the world. In Turkey, a similar
trend has also been observed in the said period and CPI inflation has edged down to 5.73
percent over the last three quarters. Thus, as of June, inflation remained at 6.8 percent, well
below the lower limit of the uncertainty band set around the target path (Figure1).
Figure 1: Annual CPI Inflation and Target Path
14
12
10
8
6
4
Annual CPI Inflation Outer Band
Yıllık Enflasyon Belirsizlik Aralığı
2
I Index* Target Path
I* Hedefle Uyumlu Patika
0
0107 0307 0507 0707 0907 1107 0108 0308 0508 0708 0908 1108 0109 0309 0509 0709 0909 1109
* Temporary tax adjustments corrected I Index.
Source: TURKSTAT, CBT.
In addition to the sharp contraction in aggregate demand; the fall in commodity prices and
temporary tax cuts within the scope of fiscal measures were also instrumental in the
sharperthan-expected drop in inflation. The fall in commodity prices specifically led to a
more-thananticipated decline in annual processed food and energy inflation. The fall in annual inflation
has reached approximately 19 percentage points for processed food prices and 25
percentage points for energy prices since October 2008, when the effects of the turmoil
started to prevail (Figure 2 and 3).
Figure 2: Food Prices Figure 3: Energy and Processed Food
Prices
(Annual Percentage Change)
(Annual Percentage Change)
27 35
Energy
Processed Food
24
22.35
30
Processed Food
Unprocessed Food
21
25
18
15
20
12
15
9
6
10
3
5
0
-3
0
0608 0708 0808 0908 1008 1108 1208 0109 0209 0309 0409 0509 0609
In this period during which the effects of the economic contraction on inflation became more
pronounced, annual inflation declined in all main groups excluding food (Figure 4). The
constant slowdown in the rate of increase in services prices continued amid weakening
domestic demand. Price hikes in the goods group excluding food and energy remained low
compared to previous years, which is attributable to the temporary tax cuts (Figure 5).
Figure 4: Contribution to Annual CPI Inflation Figure 5: CPI Sub-Groups
(Annual Percentage Change) (Second Quarter Percentage Change)
Food and Energy Tobacco and Gold
8
14 2006-07 Average
Services Core Goods
2008
7
2009
12
6
5
10
4
3
8
2
6
1
0
4
-1
-2
2
-3
0 Food Energy Goods exc. Services
Food and
0307 0607 0907 1207 0308 0608 0908 1208 0309 0609
Energy
* Food and Energy: Food, non-alcoholic beverages and Source: TURKSTAT, CBT.
energy.
** Tobacco and Gold: Alcoholic beverages, tobacco
products and gold.
Source: TURKSTAT, CBT.
The annual rate of increase in services prices declined further in the first half of the year
amid weakening cost pressures and also because of the lagged effects of the contraction in
domestic demand. It is worth noting that annual inflation in services decelerated across all
subcategories (Figure 6). Services prices are expected to edge further down in the coming
months.
Figure 6: Services Prices
(Percentage Change, First Six Months)
11
10
2006-07 average
9
2008
8
2009
7
6
5
4
3
2
1
0
Services Other Services Transport Rent Restaurant
services services
Source: TURKSTAT, CBT.
As I believe that it is essential to decouple movements of the core inflation indicators and the
likely effects of tax cuts to better understand the underlying trend of inflation and to evaluate
developments more effectively, I would like to further clarify these developments.
By the end of the second quarter of 2009, annual inflation measured by the CPI excluding
energy, unprocessed food, alcoholic beverages, tobacco and gold (H index) declined to 2.31
percent while annual inflation measured by the I index, which excludes processed food
prices, dropped to 2.98 percent. Although tax cuts contributed significantly to the decline of
the core inflation indicators, figures corrected for tax adjustments also confirm that the
underlying trend of inflation is downwards, as illustrated in the slide (Figure 7).
Figure 7: Special CPI Aggregates I and I*
(Annual Percentage Change)
9
8
7
6
5
4
3
SCA-I SCA-I*
2
1
0
0607 0807 1007 1207 0208 0408 0608 0808 1008 1208 0209 0409 0609
I*: Tax adjustments corrected SCA-I.
Source: ISE, CBT.
Parallel to these developments, while the fall in near-term inflation expectations became
more pronounced, medium-term expectations have posted a limited decline and the
expectations curve has flattened over the last three months (Figure 8 and 9). Currently,
expectations for end-2009 are anchored at 6.09 percent, well below the target. On the other
hand, end-2010 inflation expectations, calculated by averaging inflation expectations for 12-
and 24-months ahead remain consistent with the target at 6.5 percent.
Figure 8: 12- and 24-Month Ahead CPI Figure 9: Inflation Expectations Curve*
Expectations *
(Annual Percentage Change)
(Annual Percentage Change)
10
8.0
July
9
7.5
April
Inflation Target
8
7.0
6.59
7
6.5
6
6.0
6.40
5
5.5
12 month
4 5.0
24 month
4.5
3
4.0
2
0406 0706 1006 0107 0407 0707 1007 0108 0408 0708 1008 0109 0409 0709
Distinguished Members of the Press,
As I mentioned at the beginning of my speech, current global conditions play an instrumental
role in inflation developments. Inflation rates have plummeted since the second half of 2008
due to downward pressures arising from demand and cost conditions. This downward trend
also prevailed in the second quarter of 2009 (Figure 10 and 11). The trend of consumer price
inflation in developed markets turned negative in May/June 2009 and dropped to -0.56
percent in June. Consumer price inflation in emerging markets also continued to lose ground
to become 4 percent in June. In other words, inflation rates started to post a significant
downward trend globally from the last quarter of 2008 onwards.
Figure 10: CPI in Developed and Emerging Figure 11: Core CPI in Developed and
Markets Emerging Markets
(Annual Percentage Change) (Annual Percentage Change)
5 8
4
Developed Countries
7
Developing Countries
4
6
3
3
5
2 4
3
2
1
Developed Countries
2
Developing Countries (rhs)
0
1
1
-1 0
1205 0406 0806 1206 0407 0807 1207 0408 0808 1208 0409
1205 0406 0806 1206 0407 0807 1207 0408 0808 1208 0409
Source: Bloomberg, CBT. Source: Bloomberg, CBT.
2. Monetary policy response
After making brief remarks on inflation developments, I would now like to touch on the
policies pursued by the Central Bank in this period.
Anticipating that inflation would decrease sharply following the last quarter of 2008, when the
global financial crisis deepened, the Central Bank of Turkey (CBRT) has focused on
alleviating the harsh impact of the global financial crisis on the domestic economy and
financial stability. Throughout this process, the CBRT has delivered sizeable cuts in
shortterm interest rates, while providing liquidity support to financial markets by following a
countercyclical monetary policy. In this respect, considering the weak course of demand, the
ongoing tightness in lending conditions and the improvement in the inflation outlook, the
Central Bank continued the policy rate cuts, which started in November 2008, in the second
quarter 2009 as well. Thus, total policy rate cuts reached 850 basis points by July (Table 1).
Table 1: Monetary Policy Committee (MPC) Decisions in 2008 and
2009
Decision on Interest
MPC Meeting
Rates (Percentage Interest Rate
Dates
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
16 May 2008 +0.50 15.75
17 June 2008 +0.50 16.25
18 July 2008 +0.50 16.75
14 August 2008 No change 16.75
18 September No change 16.75
22 October 2008 No change 16.75
19 November -0.50 16.25
18 December -1.25 15.00
15 January 2009 -2.00 13.00
19 February 2009 -1.50 11.50
19 March 2009 -1.00 10.50
16 April 2009 -0.75 9.75
14 May 2009 -0.50 9.25
16 June 2009 -0.50 8.75
16 July 2009 -0.50 8.25
Source: CBRT.
The proper analysis of global trends and country-specific risk perceptions bears great
significance in establishing a better understanding of recent monetary policy decisions. With
the global spillover effect of the crisis as of the last quarter of 2008, central banks of
emerging markets opted for policy rate cuts above expectations with a view to restricting the
negative effects of the global crisis on economic activity. In this period, countries with
relatively stable financial markets and lower deterioration in risk premia had more room for
maneuver in their monetary policy implementations enabling them to make larger policy rate
reductions. Raised awareness regarding the relative soundness of Turkey's financial system
in this period, coupled with the expected decline in inflation, set the ground for rapid and bold
rate cuts. Acting accordingly, the Central Bank of the Republic of Turkey lowered policy rates
more than any other emerging market central bank operating within an inflation targeting
framework (Figure 12).
Figure 12: Change in Policy Rates of Developing Countries and the Relationship between
Policy Rates and Risk Premium
Change in Policy Rates
Change in Risk Premium and Policy
(Percent, 1 Sep 08 - 24 July 09)
1.5
Rates
2
(1 Sep 08- 24 July 09)
0.5
Macaristan
-0.5 0
Rusya
-1.5
Romanya
Malezya
Çek
-2
Rates
-2.5 EndonezyCumh.
Polonya
Peru
Tayland a
G.Kore
-3.5
Meksika
Policy
-4
Brezilya
in
G.Afrika
-4.5
(Percent)
Kolombiya
-5.5
-6
Change
-6.5
Şili
-8
-7.5
Türkiye
-8.5
-10
Peru
-100 -50 0 50 100 150 200
Chile
Brazil Israel
South South China
Czech
Turkey Poland Russia
Mexico Iceland Taiwan
Ukraine Change in CDS (basis points)
Hungary
Thailand Indonesi
Malaysia
Romania
Columbia
Source: Bloomberg and CBRT.
Data releases on inflation and economic activity since the inception of the cycle of rate
cutting and the favorable course of risk indicators have vindicated these preemptive
monetary policy decisions and strengthened the impact of policy decisions on expectations,
gradually bringing market interest rates down to historically low levels (Figure 13). The
Central Bank assesses that the decline in market interest rates is also attributable to policy
rate reductions, as well as maintaining flexibility in interest rate decisions in favor of a
downward bias and the recovery in risk perceptions in the second quarter of 2009.
The downward trend in market interest rates also reverberated on medium term real interest
rates causing real market interest rates to go down compared to the first quarter and to follow
a course below the levels of the pre-crisis period (Figure 14). Notwithstanding the fact that a
decline in real interest rates in periods of stagnation is an anticipated change in healthy
economies, I would like to underline that this has never been witnessed in the Turkish
economy before. In this regard, the current level of real interest rates is considered to be a
favorable development as it verifies that the Turkish economy is on the path of normalization.
Figure 13: Interest Rate Developments (Percent)
M a rk e t In te re s t R a te s P o lic y R a te s
2 6
2 4
2 2
2 0
1 8
1 6
1 4
1 2
1 0
8
1007 1207 0208 0408 0608 0808 1008 1208 0209 0409 0609
Source: ISE, CBRT.
Figure 14: Medium-Term Real Interest Rates from the Yield on
Government Securities*
(Percent)
17
15
13
11
9
7
5
1207 0108 0208 0308 0408 0508 0608 0708 0808 0908 1008 1108 1208 0109 0209 0309 0409 0509 0609 0709
* 2-year real interest rates, calculated using 2-year nominal interest rates from the
yield curve and inflation expectations from the CBRT's Expectations Survey.
Source: ISE, CBRT.
However, the Central Bank considers that market interest rates do not properly reflect the
current stance of the monetary policy and statements, and that yield curves should be more
horizontal compared to the current situation (Figure 15). In this regard, the proper monitoring
and correct understanding of the monetary policy perspective by economic agents, which I
will now go on to explain, bears great significance.
Figure 15: Yield Curves*
(Percent)
16
14
Yield 12
1 Apr 2009
16 July 2009
10
8
0.5 1 1.5 2 2.5 3 3.5 4
Term (Year)
* Estimated by using the compound returns on the bonds in the ISE Bonds and Bills
Market, based on the Extended Nelson-Siegel (ENS) method.
Source: CBRT.
3. Inflation and monetary policy outlook
Distinguished Guests,
Having summarized inflation and monetary policy developments in the second quarter of
2009, in this part of my speech, I would like to share with you the evaluation of the inflation
outlook and monetary policy of the Central Bank of Turkey in the upcoming period. In
addition, I will also outline the Central Bank's inflation forecasts presented in the Inflation
Report, which is to be posted on our website shortly. Firstly, I will briefly touch on the
economic framework underlying these forecasts.
In spite of widespread views that the recovery in the global economy will be slow and
gradual, perceptions that the worst of the crisis is over led to optimism in global financial
markets in the second quarter of the year and an increase in risk appetite. Parallel to the
recovery in global risk perceptions, the risk premia of emerging markets fell rapidly and
reached almost pre-crisis levels (Figure 16). As was the case throughout the crisis, the risk
premium of Turkey followed a relatively lower path compared to other emerging markets.
Figure 16: Risk Premium Indicators
Change in 5-year CDS rates since Aug 2008
900
(1 Aug 2008 =1)
800
Turkey
EMBI+ Türkiye
EMBI+ Turkey
Brazil
700 EMBI+
5.5
South Africa EMBI+
Hungary
600
4.5
South Korea
500
3.5
400
2.5
300
200
1.5
100
0.5
0507 1007 0308 0808 0109 0609
0808 1008 1208 0209 0409 0609
Source: Bloomberg, CBRT.
In terms of changes in currency values, the Turkish lira did not significantly differ from other
emerging market currencies. However, the relative fall in the volatility of the Turkish lira,
which had historically high volatility and extreme sensitivity to the global risk appetite, has
become more evident in 2009, when countries' own experiences began to unfold following
the worst period of the crisis (Figure 17).
Figure 17: Exchange Rate Developments
2.1 1000 Kur Oynaklığı*
TL/Kur Sepeti (0,5 Euro+0,5 ABD Doları)
Brezilya
900
0.04
2
Çek Cum.
Meksika
800
0.035
Polonya
1.9 EMBI+Türkiye (sağ eksen)
700
0.03 G.Afrika
G.Kore
1.8
600 0.025
Y.Zelanda
Şili
500 0.02
1.7
Macaristan
Türkiye
400 0.015
1.6
300 0.01
1.5
200 0.005
1.4 100 0
0607 0807 1007 1207 0208 0408 0608 0808 1008 1208 0209 0409 0609 0607 0907 1207 0308 0608 0908 1208 0309 0609
Source: Bloomberg and CBRT.
On the other hand, the currencies of emerging markets that implemented policy rate cuts of
larger amounts also performed better in the second quarter of the year, as was the case
during the entire process of the crisis. This owes its existence to the fact that changes in the
risk premia of countries during the crisis are determinants of not only exchange rate
performance but also monetary policy decisions of the said countries.
As of the second quarter of the year, policy rate reductions have become partially influential
on domestic credit markets. The marked decline in interest rates on loans extended to firms
is particularly striking (Figure 18). This has reduced the cost of credits of firms with faltering
cash flow, which they utilize to restructure their debts. Thereby, the deterioration in the
financial structures of such firms was limited and a permanent damage to the production
capacity of the economy was averted. Against the rapid decline in interest rates on loans
extended to the corporate sector, fixed and long term loan interest rates still remain high. As
a matter of fact, term premia in consumer loans are at relatively high levels and particularly
the fall in interest rates on long term loans remains relatively limited (Figure 19).
Figure 18: Interest Rates on Commercial Figure 19: Interest Rates on Consumer
Loans* Loans*
(Percent) (Percent)
26.0 2.4
Housing
Automobile
Corporate Sector
24.0
Other
2.2
22.0
2.0
20.0
1.8
18.0
1.6
16.0
1.4
14.0
12.0
1.2
10.0
1.0
0206 0606 1006 0207 0607 1007 0208 0608 1008 0209 0609
0206 0606 1006 0207 0607 1007 0208 0608 1008 0209 0609
*Interest rates on consumer loans and commercial loans are calculated on monthly and annual basis, respectively.
Source: CBRT.
While the Gross Domestic Product went down by 13.8 percent in the first quarter of 2009
compared to the same period of 2008, seasonally adjusted data indicated that contraction
intensified in this period (Figure 20 and 21). Despite the relative soundness of the Turkish
financial sector, the contraction in economic activity became more severe. What underlies
this consequence is the composition of exports, mainly of products sensitive to foreign
conjuncture; susceptibility of production to global credit conditions and Turkey's high capacity
level at the onset of the crisis. During this period, besides the tightness in financial
conditions, a sharp contraction in domestic demand was also experienced due to spreading
perceptions of uncertainty and increasing precautionary saving tendency. In this context, the
downside contribution of aggregate demand conditions to inflation increased evidently.
Figure 20: GDP Growth by Periods Figure 21: GDP
(Percent) (Seasonally adjusted, at 1998 Prices,
billion TL)
15 27
9.4
8.4
10
7.3
6.8 6.9
6.2 25
5.3
4.7
5
2.8
1.1 1.2
23
0
-5
21
-5.7
-6.2
-10
19
-15
-13.8 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2000 2001 2002 2003 2004 2005 2006 2007 2008
2004 2005 2006 2007 2008 2009
2008-1 2008-2 2008-3 2008-4 2009-1
Source: TURKSTAT Source: TURKSTAT, CBRT.
An analysis of national income developments in terms of production in the first quarter of
2009 reveals that value added has decelerated in all sectors on an annual basis. Parallel to
the sharp contraction in industrial activity, value added in the services sector became the
component contributing most-negatively- to growth (Figure 22). On the other hand, making
the said comparison in terms of expenditures, besides the sharp contraction in private sector
demand, the negative contribution of stock change is remarkable. In this period, the
contribution of net exports to growth went up due to the sharp deceleration in imports. Public
expenditures, as you can see on the slide, restricted the fall in domestic demand with a
contribution of approximately 1.2 points to growth (Figure 23).
Figure 22: Contribution to Growth from Figure 23: Contribution to Growth from
Production Expenditures (Percentage Points)
(Percentage Points)
8 7.0
Vergi
0.6
0.5
Agriculture Industry Construction Services Net
6420
0
-2
-0.1
-1 -4
-6
-1.1
-2
-8 -6.6
-1.9
-7.1
-3
-10 -8.3
in
-4
Exports
-5
Public Stocks
Private
Public
Private
Change
-5.0
Investment Investment
Net
-6 -5.6
Consumption Consumption
Source: TURKSTAT. Source: TURKSTAT.
Uncertainties in demand conditions driven by the global turmoil lead firms to adopt a cautious
approach regarding production activities. In this context, the low capacity utilization rates and
the weak course of propensity to invest continue to limit employment conditions. In the first
quarter of 2009, with the accelerating slowdown in economic activity, the negative course of
the labor market intensified in comparison with the previous quarter, and the increase in
unemployment rates continued, also due to the increase in labor force participation rates
(Figure 24).
Figure 24: Composition of the Change in Non-Agricultural
Unemployment
(Seasonally adjusted, Quarterly Difference, Thousand People)
500 Participation to Labor Market
Change in Employment
400
Net Change in Unemployment
300
200
100
0
-100
-200
-300
1 2 3 4 1 2 3 4 1
2007 2008 2009
Source: TURKSTAT, CBRT.
Recent data include signs of partial recovery in domestic demand conditions and economic
activity in line with the policy rate cut cycle, accompanied by the financial measures (Figure
25). However, the negative effects of uncertainties in aggregate demand and low capacity
utilization rates on investments and employment are expected to last in the upcoming period
as well. Besides, high levels of unemployment are expected to restrict private consumption
expenditures. In addition to these, considering the ongoing partial tightness in financial
conditions, the Central Bank considers that the uncertainties pertaining to the strength and
endurance of the recent partial revival in demand may not yet have come to an end.
Figure 25: Aggregate Index of Consumer Sentiment* and Private
Consumption Expenditures
(Annual Percentage Change)
10
5
0
-5
Private Consumption
-10 Aggregate Index
-15
1 2 3 4 1 2 3 4 1 2 3 4 1 2**
2006 2007 2008 2009
*The index is compiled by the CBRT by using production and imports of consumer
goods.
** Comprises data pertaining to April-May period.
Source: TURKSTAT, CBRT.
Distinguished Members of the Press,
The nature of the period we are going through increases the importance of monitoring data
pertaining to the speed and timing of global recovery, with respect to the foreign demand
outlook. Since the last Report period, growth forecasts for 2009 for the US economy have
been quite stable while those for the Eurozone have been revised downwards. Meanwhile,
global growth forecasts for 2010 were revised upwards by a small margin in the last quarter.
An analysis of regional growth forecasts reveals that the upward revision in the Eurozone for
end-2010 has been more limited compared to the revision in the US economy. To sum up,
while forecasts for global economic activity have become relatively more stable in the last
quarter, the outlook for the "recovery process in the Eurozone - our main trade partner - to
be anemic and protracted" has strengthened (Table 2).
Table 2. Forecasts for Annual Growth
2009 2010
Previous New Previous New
Forecast Forecast Forecast Forecast
IMF
World -1,3 -1,4 1,9 2,5
Developed Countries -3,8 -3,8 0,0 0,6
USA -2,8 -2,6 0,0 0,8
Eurozone -4,2 -4,8 -0,4 -0,3
Developing Countries 1,6 1,5 4,0 4,7
OECD
All OECD Members -4,3 -4,1 -0,1 0,7
USA -4,0 -2,8 0,0 0,9
Eurozone -4,1 -4,8 -0,3 0,0
Consensus Forecasts *
World -2,1 -2,6 1,9 2,1
USA -2,7 -2,6 1,8 2,1
Eurozone -3,4 -4,4 0,3 0,4
Source: IMF World Economic Outlook, April and IMF World Economic Outlook Update, July.
OECD Economic Outlook, Interim Report, March and OECD Economic Outlook, 2009/I,
June.
*Consensus Forecasts, April and Consensus Forecasts, July.
In sum, assessing domestic and external demand developments together, revised forecasts
for medium-term inflation are based on a framework where aggregate demand conditions
would support disinflation for a long period of time.
Distinguished Guests,
Despite the realization that recovery in the global economy will be slow, increasing
perceptions regarding the worst part of the crisis being over caused a rebound in commodity
prices. In line with this development, oil prices hovered above the previous assumption of oil
prices at USD 55 per barrel in the Inflation Report of April. Our assumption for oil prices have
been revised in line with the average of futures prices registered in the first half of July.
Within this framework, oil prices were assumed to be USD 60 on average in 2009 and
around USD 70 in 2010 and thereafter. On the other hand, projections for food inflation of 7.5
percent for end-2009 and 6 percent for the following years have been maintained.
The impact of exchange rate movements on input costs since the last quarter of 2008 was
offset by declining import prices. Therefore, import prices denominated in domestic currency
did not display significant changes. While generating medium-term forecasts, it was assumed
that imported input costs would increase gradually, in line with the anticipated slow recovery
in global economic activity.
Furthermore, revised forecasts envisage that world interest rates will remain low for an
extended period of time. Regarding fiscal policy, it is assumed that fiscal discipline will be
established within a medium-term program. Moreover, it is assumed that adjustments in
taxes/administered prices in the second half of 2009 will add around 1.5 percentage points to
2009 inflation.
Distinguished members of the Press and Esteemed Guests,
Against this background, assuming that there is further easing in policy rates in the near term
followed by no change until the end of 2010, medium-term forecasts suggest that, with 70
percent probability, inflation will be between 4.9 and 6.9 percent with a mid-point of 5.9
percent at the end of 2009, and between 3.7 and 6.9 percent with a mid-point of 5.3 percent
at the end of 2010. Furthermore, inflation is expected to come down to 4.9 percent by the
end of 2011 and to 4.8 percent by mid-2012 (Figure 26).
Figure 26: Inflation and Output Gap Forecasts*
(Percent)
Output Gap
Forecast Range *
Tahmin Aralığı* Çıktı Açığı
Uncertainty Band for 2009
2 009 için Belirsizlik Aralığı Yıl End-year Sonu Inflation Enflasyon Targets Hedefleri
13
11
Kontrol Ufku
Control Range
9
7
5
3
%
Yüzde
1
-1
-3
-5
-7
-9
1 2 3 4 1 2 3 4 1 2 3 4 1 2
2009 2010 2011 2012
* Indicates a 70-percent confidence interval for the forecast.
Revised forecasts indicate that even if policy rates are kept at low levels for an extended
period, aggregate demand conditions will continue to underpin the disinflation process over
the next two years. Forecasts also indicate that significant base effects may lead to some
inflation volatility in the short term. As cumulative inflation during the first half of 2009 has
been historically low at 1.83 percent, it is estimated that inflation will rise in the first half of
2010 due to base effects (Figure 26). As the impact of adjustments in taxes and administered
prices made for the sake of budget balance will ease, we forecast that inflation will display a
downward trend starting from the second half of 2010 and stabilize slightly below the
end2011 target of 5.5 percent. It is critical to note that inflation would be less persistent and thus
the economic recovery would be smoother if economic agents adopt these forecasts as a
benchmark in their pricing decisions.
I would like to underline that any new data or information regarding the inflation outlook may
lead to a change in the monetary policy stance. Therefore, assumptions on future policy
rates underlying the inflation forecast should not be perceived as a commitment on behalf of
the CBRT.
Risks
Distinguished Members of the Press,
In the last part of my presentation, I would like to mention the risks with respect to the
inflation outlook in the upcoming period and give some information pertaining to the probable
monetary policy strategy should these risks materialize.
As I have mentioned earlier in my speech, despite having partially receded, the risks
regarding the global economy are still important for the inflation and monetary policy outlook.
In particular, ongoing problems in credit and labor markets pose downside risks on global
activity. Should global conditions and consequently domestic economic activity further
deteriorate, the CBRT would consider another cycle of rate cuts, and then maintain policy
rates at low single digits for an extended period of time.
Another possible scenario is a surge in capital inflows to emerging markets owing to the
relative improvement in creditworthiness of these countries. In this context, receding risk
premia and appreciating currencies would present downside risks regarding inflation
prospects. These circumstances could also trigger acceleration in rate cuts, or another
easing cycle, which could then bring policy rates which hover around low single digits for a
prolonged period of time.
Increasing budget deficits worldwide continue to pose risks on inflation expectations and thus
on global interest rates in the long term. The medium-term forecasts presented above
envisage that the slow recovery in global economic activity and rising saving rates will keep
global interest rates at low levels for an extended period. However, the lack of a clear exit
strategy from global fiscal stimulus packages creates upside risks regarding global inflation
rates and therefore longer-term global interest rates.
Counter-cyclical fiscal policies to curb the contractionary effect of the crisis on economic
activity, which have also been introduced in Turkey in line with global trends, have
accelerated the rise in budget deficit. The relatively low level of public sector indebtedness in
Turkey compared to other countries implies that we have a broad fiscal space. However,
when the maturity composition of borrowing, the level of interest rates and the depth of
financial markets are taken into account, it is observed that the fiscal space is not broad
enough for countercyclical fiscal policies. Therefore, backing up the short-term increase in
budget deficit with a medium-term program ensuring the sustainability of debt dynamics is
crucial for maintaining our risk premium at relatively low levels.
Accordingly, domestic perceptions regarding public finance are very important for the
monetary policy strategy to be implemented in the medium-term, especially after 2011. The
global crisis has raised awareness as to the resilience of our financial system and helped risk
indicators to perform better compared to other developing countries and enabled a fast
ratecut cycle. Thus, single-digits were finally achieved in short-term interest rates after many
years. Meanwhile, the level of medium and long-term market interest rates still remain
elevated. The present conjuncture offers an important opportunity to achieve and maintain
single digits in market interest rates throughout the forecast horizon of three years. Achieving
and maintaining single digits in medium and long-term market interest rates will depend on
establishing fiscal discipline. The introduction of a satisfactory perspective for fiscal discipline
in the upcoming period would not only decrease the risk premium but would also help to
keep policy rates at low levels for an extended period of time. Therefore, should a concrete
medium-term fiscal program, which safeguards the sustainability of debt dynamics and
budget discipline, be established, it is possible that market interest rates will remain at low
levels permanently.
Distinguished members of the press,
To sum up, growing percept