01 August 2017
SUMMARY OF THE MONETARY POLICY COMMITTEE MEETING
Meeting Date: 27 July 2017
1. In June, consumer prices were down 0.27 percent and annual inflation decreased by 0.82 points to 10.90 percent. Food inflation dropped on the back of fresh fruits and vegetables while annual energy inflation continued to decelerate. The lagged effects of the cumulative Turkish lira depreciation continued to weigh upon core goods whereas annual core goods inflation declined due to prices of durable goods. There is an improvement in underlying inflation in this period, even after adjusting for the transient effects of the methodology change in the clothing price index.
3. Prices of services rose by 0.53 percent while annual services inflation inched up by 0.12 points to 9.18 percent in June amid factors such as rising transport prices driven by the lagged effects of increased fuel prices, and higher catering prices due to the indirect effects of increased food inflation, particularly in red meat. In addition to cost increases driven by exchange rates, fuel prices and food prices, factors affecting services inflation also include indexation to headline inflation.
5. In sum, inflation edged down but still remains high. Despite the disinflationary impact of recent cost developments and a likely partial correction in food prices, the high inflation remains a risk to the pricing behavior.
Factors Affecting Inflation
6. Recently released data indicate an ongoing recovery in the economic activity. An evaluation of April and May industrial production figures jointly suggests a stronger quarter-on-quarter increase in the second quarter. Survey indicators of June show that this outlook will be maintained. Not only the manufacturing industry, but also services, retail trade and construction saw strengthening activity recently. Accordingly, economic recovery appears to be more widespread across sectors.
7. A similar outlook is also visible in demand indicators. Both consumer confidence and investment tendency have improved recently. The consumer demand for categories subject to incentives remains strong while investments signal some pickup after the subdued course in the first quarter. Domestic demand is likely to make more contribution to growth in the second quarter.
9. The uptick in the labor market, which started in February and March, grew more apparent in April period. Supported by rising employment in non-farm sectors, unemployment rate records a decline. Leading indicators hint at a further decrease in unemployment rate amid the economic recovery.
Monetary Policy and Risks
12. Despite the current favorable outlook in global economic activity, downside risks to global economy reside as well. In particular, should the normalization process of the Fed’s policy-rate increase and the balance sheet downsizing prove faster than expected, the high risk appetite and low volatility cycle in financial markets may reverse. That may generate fluctuations in prices of securities in advanced economies and weaken the growth trend. Moreover, fading risk appetite may cause fluctuations in portfolio flows to emerging economies as well. In addition to these, the course of Brexit talks and effects of the blurred global economic policies like foreign trade protectionism that is on the agenda of many countries, particularly the US, are monitored closely.
14. Recently-released indicators confirm the previous view that downside risks to economic activity have abated and the economic recovery will prove more robust as of the second quarter of the year. Signals for a wider sectoral spillover of the pickup in economic activity led by exporting sectors compared to the previous periods are important to a stable recovery in growth. The gradual improvement in tourism revenues, the strengthened confidence channel, the positive effect of the cumulative depreciation on net exports and the normalization of commercial relations with Russia support growth. Moreover, the measures and incentive packages to boost consumption and investment expenditures, reduced uncertainty and improved financial conditions will continue to spur growth. The improvement in employment and the fall in unemployment rate on the back of the ongoing recovery constitute a ground for the maintenance of this trend and increased contribution of domestic demand to growth. Investment is envisaged to exhibit a gradual improvement as uncertainties wane and the climate of confidence grows stronger. On the other hand, the pace of recovery in tourism revenues, uncertainties regarding monetary policies of advanced economies, the course of capital flows and geopolitical developments constitute a downside risk to growth also in 2017, as they have recently.
16. The Committee evaluated medium-term projections to be presented in the July Inflation Report in the meeting. Accordingly, year-end inflation forecast was revised upwards by 0.2 points for 2017, while it was kept unchanged for 2018 compared to the 2017 April Inflation Report. Given a tight policy stance that focuses on bringing inflation down, inflation is estimated to converge gradually to the 5-percent target. Accordingly, inflation is likely to be 8.7 percent at end-2017, and stabilize around 5 percent in the medium term after falling to 6.4 percent in 2018.
18. Against this background, the Committee decided to maintain the tight monetary policy stance in its July meeting and kept the Late Liquidity Window lending rate constant at 12.25 percent. The CBRT will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained until inflation outlook displays a significant improvement. The CBRT formulates monetary policy by taking the medium-term inflation into account, thus focusing on the developments in underlying inflation rather than the anticipated fluctuations driven by the base effects during the course of the year. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and further monetary tightening will be delivered if needed.
20. In recent years, sustained fiscal discipline has been one of key factors in lowering the sensitivity of the Turkish economy against external shocks. The room provided by fiscal discipline facilitated the implementation of expansionary fiscal policy. Structural measures to provide room for counter-cyclical fiscal policies will enhance the coordination of monetary and fiscal policy, and improve macroeconomic stability.