Erdem Başçi: The importance of commodity price movements
Opening remarks 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,
6 April 2012.
* * *
Distinguished guests,
Welcome to the conference on the "Policy Responses to Commodity Price Movements"
jointly organized by the International Monetary Fund, the IMF Economic Review and the
Central Bank of the Republic of Turkey. As I will deliver another speech in the panel session
on the second day of the conference, I will attempt to keep this inaugural speech as brief as
possible. As you will recall, we hosted a conference on commodity price volatility in Istanbul
last September within the context of G-20 program. These two conferences on similar topics
in such a short time are clear indicators of how important the commodity price movements
are for the global economy.
Why are commodity prices so important? When we think of what is covered by "commodities"
more closely, we also come up with how we should approach this issue. Usually, the term
"commodity prices" represent energy prices (mainly the crude oil), food prices and the prices
of some main industrial inputs. Energy prices are very closely monitored by economic units
and policy makers, for it denotes the cost of one of the most significant inputs for the entire
economy. Energy is one of the primary cost factors for firms. It is also a considerable item for
households' heating and transportation expenditures. On the other hand, due to its high
share in the expenditures of especially low-income households and corresponding
purchasing power effects, food prices are given a great importance by policy makers.
Meanwhile, the metals, such as iron ore, copper and aluminum, are among the most
important raw materials for the industry and construction sector.
The reason why commodity prices have been frequently attracting attention is the current
fluctuations in commodity prices of a magnitude that has not been seen since 2007. Price of
brent crude oil, which was USD 50 per barrel in early 2007, climbed to USD 145 within one
and a half year. Then, parallel to the deepening global crisis in late 2008, crude oil prices
went back to USD 35; and now it is hovering around USD 125. And the uncertainties about
oil prices, resulting from demand and supply-side developments, and their potential effects
keep the policymakers interest in commodity prices alive in the current economic outlook.
As they are among the risk factors that affect the inflation outlook, we directly referred to
commodity prices, mostly to those of crude oil and food, in our latest inflation reports. As a
matter of fact, nearly half of the revisions about official inflation forecasts published in our
inflation reports in the last couple of years originated from the changes in our assumptions
about food and commodity prices. This suggests that the rise in commodity prices may bring
about challenges for central banks not only in terms of direct pressures on inflation. The
uncertainties due to commodity price fluctuations also stand out as an important issue for the
monetary policy communication and expectations management by the central banks.
Structure of the commodity price dynamics is also of great importance for they constitute an
input for the monetary policy decisions of the central banks. For example, the sources of the
commodity price fluctuations and the nature of the shocks are extremely influential for the
determination of the policy responses to these fluctuations. Similarly, not only the level but
also the volatility of commodity prices can have a significant effect on the macroeconomic
activity. For example, a shock affecting the level of crude oil prices may have a different
effect on economy, if it is observed in a period where the volatility of prices is also higher.
Inflation
IV III
Growth
I II
As I have briefly mentioned before, an increase in the commodity prices creates downward
pressure on the growth prospects, and upward pressure on inflation. In Turkey, the
investment incentive package that was announced yesterday will support our economic
growth through the supply side, and the tighter monetary policy will eliminate the inflation
risks.
The sessions on each day of the conference will provide platforms for studies which are of
very rich content and great potential benefit for policymakers. For example, macroeconomic
effects of the commodity price dynamics and possible corresponding policy responses are
among the main themes elaborated during the conference. Another important issue to be
discussed is how the effects of commodity prices on inflation, economic activity and
exchange rates differ with respect to different monetary policy regimes. Another important
issue is the interaction among different economic policies vis-a-vis the commodity price
fluctuations.
Distinguished guests,
Studies included in the program will substantially contribute to the understanding of the
commodity price dynamics and the policy responses against the macroeconomic effects of
these dynamics. In this context, I would like to thank the organization committee for their
efforts for this conference program which gathers very interesting and enlightening studies. I
also believe that the conference will provide a platform which will be highly beneficial for the
exchange of views among participants.
Thank you very much in advance to all participants for their contribution. Now, I would like to
give the floor to Pierre-Olivier Gourinchas, professor of economics at California
University-Berkeley and the chief editor of the IMF Economic Review journal to open the first
session.