20 December 2018
Summary of the Monetary Policy Committee Meeting
1. In November, consumer prices dropped by 1.44% and annual inflation decreased by 3.62 points to 21.62%. Annual inflation registered a decline across all subcategories. The fall in core goods inflation was mainly led by temporary tax cuts applied to durable goods. In this period, energy prices dropped due to the fall in oil prices and the appreciation in the Turkish lira. Against this background, annual inflation and the underlying trend in core indicators both decelerated. In sum, consumer prices in November reflect tax cuts, the appreciation in the Turkish lira, and falling oil prices as well as demand-side effects led by weaker economic activity.
3. Energy prices were down by 0.71% and annual inflation in this group fell by 4.08 points to 25.35%. This is attributed to falling international oil prices and the appreciation in Turkish lira. Leading indicators for December indicate that the support from fuel prices to consumer inflation continues at a strong pace.
5. The annual services inflation fell by 0.09 points to 14.67%. Annual inflation declined in rents and transport services, but remained almost flat in communication, restaurants-hotels and other services groups. Cost-side factors led by food and fuel prices had a positive effect on the catering and transportation services inflation. Meanwhile, weakening domestic demand supported the overall slowdown in services inflation.
Factors Affecting Inflation
6. In the third quarter, Turkey’s Gross Domestic Product (GDP) contracted by 1.1% quarter-on-quarter but grew by 1.6% at an annual basis. The economic slowdown was driven by domestic demand, with both consumption and investment expenditures down from the previous quarter. Public consumption was another drag on quarterly growth. As a result of the domestic demand-led sharp drop in imports coupled with robust exports of goods and strong tourism demand, net exports made an increased contribution to quarterly and annual growth and prevented the economy from contracting further.
8. Despite recent signs of some slowdown in global growth, external demand maintains its strength. Firms’ orientation towards external markets amid sluggish domestic demand and their flexibility in market diversification stimulate exports of goods; and external balances continue to improve rapidly on brisk tourism demand. On the other hand, imports remain on a downward slide, largely due to consumption and investment goods, which led to historically high current account surplus in August – October period. The rapid improvement in current account balance is expected to continue in the period ahead. Accordingly, net exports are expected to contribute further to growth in the fourth quarter and limit the economic slowdown to some extent. The Committee noted that exports of goods and services will continue to spur growth in the coming months and the falling import demand reflecting weak domestic demand will continue to have a positive effect on the current account balance.
Monetary Policy and Risks
11. Despite the weakening global economic activity, global inflation has risen due to both advanced and emerging economies. This rise is mainly attributable to energy prices led by oil prices, which generally hovered at high levels throughout the first three quarters of 2018. In the recent period, oil prices have decreased notably driven by both supply and demand factors. This decline is expected to exert downward pressure on the inflation of both advanced and emerging economies. On the wages front, the unemployment rates, which are at historically low levels in some advanced economies, remain to be a wages driven upside risk factor for global inflation.
13. While developments in import prices and domestic demand conditions have led to some improvement in the inflation outlook, risks to price stability continue to prevail. Elevated levels of inflation and inflation expectations, and uncertainties over the course of cost factors continue to pose risks to the pricing behavior in the coming period. Accordingly, the Committee has decided to maintain the tight monetary policy stance until the inflation outlook displays a significant improvement and kept the policy rate (one week repo auction rate) constant at 24%.
15. The fiscal policy outlook that the monetary policy is based on incorporates a policy stance that focuses on price stability and macroeconomic rebalancing and that is coordinated with the monetary policy. Accordingly, the monetary policy stance assumes that administered price, tax and wage adjustments are formulated in a way that will help reducing the backward indexation behavior. If the fiscal policy significantly deviates from this framework leading to an adverse impact on the medium-term inflation outlook, the monetary policy stance may be revised.