Summary of the Monetary Policy Committee Meeting (2024-30)


No: 2024-30

30 May 2024

Summary of the Monetary Policy Committee Meeting

Meeting Date: 23 May 2024

Global Economy

1.    In the first quarter of the year, the global growth outlook displayed a limited improvement while labor markets continued to be tight. The global growth index, which is weighted by the export shares of Türkiye’s foreign trade partners, is forecasted to grow by 2.1% in 2024 that is slightly higher than 1.8% recorded in 2023, and global economic activity remains weak. The first quarter growth data for advanced economies is supportive of the moderate recovery in economic activity, while leading indicators suggest that this recovery is mostly driven by the services sector. The US economic growth trend continued to diverge positively from other advanced economies. Geopolitical risks and maintaining tight monetary policies to ensure a permanent decline in inflation are regarded as prominent risk factors for the course of global economic activity in 2024.

2.    The high levels of core inflation and inflation expectations imply that global inflation will continue to remain above central banks’ targets for some time. Despite the sharp decline in inflation in 2023, stickiness in services inflation is particularly evident in many countries. While emerging economies (EMEs) continue to cut interest rates in a way to maintain monetary tightness, the central banks of advanced economies are also expected to start rate cuts in 2024. However, due to stickiness in inflation, geopolitical developments, and increased risks pertaining to commodity prices, central banks are expected to adopt a cautious approach in rate-cuts. Meanwhile, expectations for growth, inflation outlook, and monetary policies of advanced economies continued to diverge, and risk appetite and portfolio flows towards EMEs have displayed a volatile course due to increased global uncertainty.

Monetary and Financial Conditions

3.    While financial conditions remained significantly tight, excess liquidity in the market due to residents' and non-residents' preference for Turkish lira assets, had an impact on Turkish lira deposit rates. Turkish lira deposit rates have decreased by 163 basis points since the week ending 26 April and stood at 58.68% as of 17 May. In the same period, commercial loan rates decreased by 336 basis points to 63.70% due to the slowing demand for Turkish lira-denominated loans of the corporate sector. On the retail loans side, general-purpose loan rates (excluding Overdraft Accounts (ODA)) declined by 327 basis points to 78.04%, while housing loan rates remained flat at 44.88%. Vehicle loan rates, on the other hand, increased by 17.44 points to 43.59% with the termination of the recent campaigns and converged to the pre-campaign level as of 17 May 2024.

4.    The effects of monetary tightening on credit conditions and domestic demand are closely monitored. Turkish lira loan growth, which has decelerated notably since the March MPC meeting period, is expected to support the slowdown in domestic demand, which showed its initial signs of weakening, with the help of monetary and quantitative tightening measures. In this context, the average four-week growth rate of retail loans has declined since the week ending 26 April, falling from 3.28% to 1.44% as of 17 May. This decline can be attributed to the significant fall in personal credit cards from 5.01% to 1.12%, despite the limited increase in general-purpose loans from 2.49% to 2.70%. Average four week growth rate of vehicle loans have remained in negative territory, and the average four-week growth rate of vehicle loans has become -1.40%. Turkish lira-denominated commercial loans have also remained weak, and their average four-week growth rate has been almost flat at 0.03%. The growth in FX commercial loans adjusted for exchange rates have diverged from TL commercial loans and increased from 2.89% to 4.88%.

5.    Within the scope of simplifying the macroprudential framework and enhancing the functionality of the market mechanism, the securities maintenance practice was terminated as of 9 May 2024.

6.    The gross international reserves of the Central Bank of the Republic of Türkiye (CBRT) increased by USD 15.05 billion compared to the April MPC meeting period to USD 139.1 billion as of 17 May 2024. Türkiye's five-year credit default swap (CDS) premium declined to 263 basis points as of 22 May 2024. The one-month implied exchange rate volatility of the Turkish lira rose to 11.95%, while the 12-month implied exchange rate volatility reached 22.14% as of 22 May 2024. Since the previous MPC meeting week, the change in non-resident investors' positions has remained quite limited in the equity market, while net portfolio inflows have totalled USD 5.54 billion, almost all of which was directed towards the government domestic debt securities (GDDS) market.

Demand and Production

7.    Recent indicators point to a slowdown in domestic demand compared to the first quarter. Following upsurges on a monthly basis in January and February, the retail sales volume index remained flat in March, and the growth rate of the index gained momentum in quarterly terms. The trade sales volume index was also up on a monthly and quarterly basis in the first quarter, while, the services production index pointed to a moderate quarterly increase in services sector activity. Card spending surged in the same period. Accordingly, the level of demand remained as a risk factor on inflation. The high-frequency data and information from regional business contacts, for the April-May period, point to some signs of moderation in the domestic demand. As of April, the manufacturing PMI figures indicate a slowdown in production due to the decline in new orders. Card spending data and information on consumption expenditures from interviews with firms point to a slowdown in domestic demand in the second quarter compared to the first quarter. 

8.    In March, the industrial production index dropped by 0.3% month-on-month when adjusted for seasonal and calendar effects, yet increased by 4.3% year-on-year when adjusted for calendar effects. On a quarterly basis, industrial production increased by 3.5%. The sharp monthly increase was driven by the hikes in typically highly-volatile items, notably the manufacture of other transport equipment. When these items are excluded, the quarterly rate of change was 2%, which is more moderate than the change in the overall index. In April, the seasonally adjusted manufacturing industry capacity utilization rate was realized as 77%, implying a flat course on a quarterly basis.

9.    As of March, seasonally adjusted employment rose by 1.7% on a quarterly basis and stood at 32.4 million people. In this period, the labor force participation rate increased quarter-on-quarter, while the unemployment rate was down by 0.1 points to 8.7%. Survey indicators, on the other hand, indicate a decline in manufacturing firms' future employment expectations.

10.    In March, the current account deficit stood at USD 4.5 billion on a monthly basis and decreased to USD 31.2 billion in annualized terms. This fall was driven by the ongoing decline in energy imports on an annual basis and the continuing, albeit slower, decline in the foreign trade deficit excluding gold and energy. On the other hand, the gold trade deficit remained relatively flat compared to the previous month. The TURKSTAT's revisions in tourism statistics led to an upward revision in travel revenues for the 2012-2023 period. Thus, the strong contribution of travel revenues – the driver of services revenues – to the current account balance has become more evident in retrospect. In March, the annualized services balance surplus remained similar to the previous month.

11.    In April, provisional foreign trade data pointed to a flat trend in seasonally adjusted exports and a rise in imports. Gold imports remained above the historical averages, flattening around USD 23 billion in annualized terms. Meanwhile, consumption goods imports increased in April, limiting the improvement in the current account balance. When the provisional foreign trade data for April is considered along with the high frequency data for May, the three-month average trends imply a relatively flat course in exports and an increase in imports. The trend in imports of consumption goods is closely monitored, in tandem with a number of other indicators, to assess the impact of the monetary tightening on domestic demand.

12.    Regarding the financing of the current account deficit, the banking sector’s annualized long-term debt rollover stood at 123% in March 2024. In the non-bank corporate sector, this ratio was around 97%. Accordingly, external financing opportunities improved compared to the previous month.

Inflation Developments

13.    In April, consumer prices rose by 3.18%, and annual inflation went up by 1.30 percentage points to 69.80%. In this period, the contribution of core goods, services, energy and alcohol-tobacco-gold groups to annual inflation rose, while contribution of food group decreased. Meanwhile, in seasonally adjusted terms, the downward trend in monthly consumer inflation continued. 

14.    In April, monthly price increase in the services group remained high. In addition to subgroups such as rents and restaurants-hotels that have recently stood out in this respect, transport services displayed a strong rise due to the holiday effect, as well. In this period, seasonally-adjusted monthly core goods inflation decelerated due to the moderate increase in automobile prices. In the food group, monthly price increases were driven by unprocessed food prices, while the moderate trend in processed food inflation was retained. The rate of increase in red meat prices continued, albeit at a slower pace, and the food group, particularly meat prices, continued to have a negative impact on headline inflation not only directly but also indirectly through the catering services channel. Meanwhile, in this period, annual food inflation fell below the headline inflation for the first time in three years. In tobacco products, producer-driven price hikes were observed. As for energy prices, the rise in fuel prices due to developments in TL-denominated oil prices was offset by the decline in natural gas prices due to the mechanical impact. As a result, energy prices remained unchanged on a monthly basis. In April, the mechanical impact of the free use of natural gas on monthly consumer inflation was -0.14 percentage points.

15.    The underlying trend of monthly inflation registered a limited decline in April. The seasonally adjusted monthly rates of increase in the B and C indices were realized as 3.0% and 3.2%, respectively, slightly weaker compared to the previous month. The seasonally adjusted three-month average increases in the B and C indices were measured at 3.4% and 3.6%. Among the components of the B index, price increases in the processed food subgroup remained moderate, while there was a slowdown in core goods and services groups. In this period, the Median, SATRIM, and other underlying trend indicators as well as the diffusion index remained almost flat.

16.    In addition to the high level of and the stickiness in the services inflation, inflation expectations, geopolitical risks, volatility in commodity prices and food prices keep inflationary pressures alive. 

17.    The prevalent price setting behavior in the services sector leads to significant inertia and causes the impact of shocks on inflation to extend over a long time. In April, annual inflation was recorded at 57.1% in core goods and it was around 40 percentage points higher in services at 97.0%. Moreover, in April, the diffusion index for the services sector hovered around 40% above its historical average, indicating that increases continued to spread across the sector. In this regard, based on the recent realizations of consumer inflation, there is a risk that inflation will remain high in certain services items for an extended period. Certain services sectors such as rents, communication and restaurants-hotels are expected to stand out in this respect.

18.    Leading indicators tracked through micro data from the Retail Payment System (RPS) imply that the rate of rent increases in new and renewed contracts, despite being below the current annual level in the consumer price index, remains relatively high. On the other hand, the annual increase in house prices dropped to 52.0% in March, falling below annual consumer inflation, while the seasonally adjusted data point to a significant slowdown also in the monthly increases in this item in recent months. This development in house prices is expected to have a restraining effect on rent inflation in the coming period. However, the forthcoming repeal of the 25% rent increase cap will also be closely monitored for its impact on rent inflation. Communication services have posted sharp month-on-month price increases, led by mobile call and internet fees. Annual communication inflation, which has historically been on a mild course, reached 66.3% in April, close to consumer inflation. Due to the commitment subscription mechanism in certain services items of the communication group, past cost pressures are reflected in consumer prices with a lag and also in a gradual manner depending on the rate of contract renewal. Monthly inflation in the restaurants-hotels subgroup of services remains elevated driven by food prices, meat in particular. On the other hand, the reversal of the ongoing substantial increases in carcass meat prices will restrain the upward pressures on catering services in the period ahead.

19.    In April, domestic producer prices rose by 3.60%, while annual inflation went up by 4.19 percentage points to 55.7%. According to main industrial groupings, energy, non-durable and durable consumption goods groups stood out with sharp monthly price increases. Annual inflation rose in all groups, except for the capital goods.

20.    Having declined since October 2023, global commodity prices assumed an upward course in January that continued into April. Both energy and non-energy commodity prices rose in April, with the rise in industrial metal and gold prices coming to the fore in the non-energy commodity group. As of the first three weeks of May, the increase in non-energy commodity prices decelerated, while prices in the energy group declined. Accordingly, external price pressures have weakened somewhat.

21.    In April, the Global Supply Chain Pressure Index decreased slightly compared to its historical trend. Container freight indices tracked fell in April over the previous month but increased again as of the first three weeks of May. The evolution of transportation costs in the following months and their possible impact on inflation are the factors to be monitored closely.

22.    According to the results of the Survey of Market Participants in May, inflation expectations have declined across all horizons. The 12-month-ahead inflation expectation was revised down by 2.0 percentage points from 35.2% to 33.2%, while the 24-month-ahead inflation expectation decreased by 0.8 percentage points from 22.1% to 21.3%. In addition, inflation expectations for the current year-end and the end of the next year, which had remained flat in the previous month, dropped in this period to 43.6% and 25.6%, respectively. Meanwhile, the five-year-ahead inflation expectation went down from 12.3% to 11.8%. Although inflation expectations have declined across all horizons, the current levels remain above our inflation forecasts in the May Inflation Report and continue to pose an upside risk to the inflation outlook. The Committee closely monitors the alignment of inflation expectations and pricing behavior with projections.

23.    Leading indicators point to a relatively flat course in the underlying trend of inflation in May, consistent with the projections in the May Inflation Report. Across the groups making up the B index, monthly price increases are expected to lose pace, albeit slightly, in the services and core good groups compared to the previous month. Preliminary data suggest that the price increases in durable goods that have relatively high exchange rate pass-through have decelerated significantly as a reflection of the recent mild course in exchange rates. Prices in the clothing and footwear subgroup are on the rise due to seasonal transition. Monthly inflation in the services group is expected to remain elevated compared to the core goods group, despite a slowdown over the previous month. On the other hand, monthly inflation in processed food, which had been mild for a while, has strengthened this month, while unprocessed food prices retreated, led by vegetable prices. Moreover, the rise in red meat prices in the unprocessed food subgroup has decelerated significantly in May on the back of the fall in carcass meat prices. As for processed food inflation that is projected to remain high on a monthly basis, the leading drivers are bread and cereals as well as meat and dairy products reflecting the price hikes in the related unprocessed food items. The energy group will have a marked impact on consumer inflation in May.

24.    In the energy group, despite the fall in fuel prices in tandem with dropping international crude oil prices, a high monthly increase will be seen in May due to the expiry of the free use of 25 m3 natural gas. In fact, the mechanical effect of the expiry of this offer is estimated to push monthly consumer inflation up by 0.7 points in May. Adjusted for this natural gas-driven effect, seasonally adjusted consumer inflation is expected to decline compared to April. Despite the mild course of monthly inflation, annual consumer inflation will rise notably in May, which will be led by the base effect stemming from energy prices as mentioned in previous policy documents. In fact, energy prices fell quite sharply in May 2023 on the back of the free use of natural gas. Accordingly, annual inflation is estimated to surge in May due to the base effect in consumer prices, while annual changes in B and C indicators are expected to follow a moderate course.

Monetary Policy

25.    Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks.

26.    The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Consequently, disinflation will be established in the second half of 2024.

27.    Considering the recent developments in credit growth and deposits, additional steps were taken to preserve the macro financial stability and to support the monetary transmission mechanism. The excess liquidity stemming from the surging domestic and foreign demand for Turkish lira financial assets was decided to be sterilized through additional measures. Accordingly, reserve requirement ratios for Turkish lira deposits and FX-protected deposits (KKM accounts) were raised, withdrawing approximately 550 billion TL of liquidity from the system. Moreover, in order to ensure a faster decline in KKM accounts, changes were made regarding the remuneration and commission practices for reserve requirements. Lastly, taking into account the acceleration in foreign currency loan growth, a monthly growth limit of 2% has been introduced for foreign currency loans, and it was decided to block Turkish lira required reserves amounting to loans exceeding the limit for one year. Impact analyses of the CBRT's regulations are conducted for all components of the framework by assessing their impact on inflation, interest rates, exchange rates, reserves, expectations, and on financial stability with a holistic approach.

28.    Taking into account the lagged effects of monetary tightening, the Committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5 percent inflation target in the medium term. 

29.    Indicators of inflation and underlying trend of inflation will be closely monitored and the Committee will decisively use all the tools at its disposal in line with its main objective of price stability.

30.    The Committee will make its decisions in a predictable, data-driven and transparent framework.

Summary of the Monetary Policy Committee Meeting (2024-30)