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Recent Developments in Monetary Policy, Inflation and External Balance Mehmet Yorukoglu Deputy Governor April 2012 Contents I. The New Policy Framework II. Rebalancing III. Growth IV. Inflation 2 THE NEW POLICY FRAMEWORK 3 Multiple Instruments, Multiple Objectives KEY INDICATORS INSTRUMENTS Reserve Requirements Macroprudential Tools Interest Rate Corridor Funding Strategy Credit Policy Expectations Weekly Repo OBJECTIVES Interest Rate Policy Credit Growth Exchange Rate Liquidity Policy Price Stability Financial Stability 4 Liquidity Policy Source: CBRT. CBRT Policy Rates The Average Cost of CBRT Funding (Percent) (Percent) Latest Observation: April 20 , 2012. Source: CBRT. Latest Observation: April 20, 2012 5 Credit Policy Reserve Requirements Source: CBRT. Latest Observation: April 05, 2012 6 REBALANCING 7 Credit Growth and External Deficit Credit Growth and Current Account Deficit (Percent, 12 month cumulative) 12 16 Δ in Credit Stock / GDP (right axis) 10 14 12 8 10 6 8 6 4 Current Account Deficit / GDP 4 2 2 0 0 Source: CBRT. 8 Credit Growth Total Loan Growth Rates (13 Weeks Moving Average, Annualized, FX Adjusted, Percent) 60 2012 2007-2011 average 2011 50 40 30 20 10 0 Source: CBRT. Latest Observations: March 18, 2012 9 Rebalancing Real Exports and Imports (2003=100, Seasonally Adjusted) 200 Imports 180 160 Exports 140 120 100 1 2 3 4 2005 1 2 3 2006 4 1 2 3 2007 4 1 2 3 2008 4 1 2 3 2009 4 1 2 3 2010 4 1 2 3 4 2011 Source: TURKSTAT, CBRT. 10 Rebalancing Final Domestic Demand and Exports (2008Q1=100) Source: CBRT. *2012Q1 is forecast. 11 Exchange Rate 01.11.2010 – 22.08.2011 23.08.2011 – 11.04.2012 Source: Bloomberg, CBRT. Note: Positive change means depreciation against US dollar. 12 Real Exchange Rates CPI Based REER* (Base year: 2003) QE2 Source: CBRT. Policy Reaction *Reel effective exchange rate, Natural logarithms. 13 Real Exchange Rates CPI Based (Developed Economies) REER* (Base year: 2003) Source: CBRT. QE2 Policy Reaction *Natural logarithms. 14 Real Exchange Rates CPI Based (Developing Economies) REER* (Base year: 2003) QE2 Source: CBRT. Policy Reaction *Natural logarithms. 15 Exchange Rate Volatility Volatility in Emerging Market Currencies (Percent, Implied for the next 12 months) Source: Bloomberg, CBRT. *Emerging market currencies include Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia. Latest Observations: April 16,2012 16 Quality of Capital Inflows Main Sources of Current Account Deficit Finance (12-months Cumulative, Billion USD) Source: CBRT. *Short-term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. **Long-term capital movements are sum of banking and real sectors’ long term net credit and bonds issued by banks and the Treasury. 17 GROWTH 18 Gross Domestic Product Actual GDP (Base Quarter: 2008Q1, Seasonally Adjusted, Natural Logarithms) Source: CBRT. *2012Q1 is forecast. 19 Soft Landing Industrial Production and PMI in Turkey (2005=100, Seasonally Adjusted, Monthly) 135 60 127,53 130 55 125 120 50 49.6 115 45 110 105 40 100 IP PMI (right axis) 35 95 90 30 Source: MARKIT, TURKSTAT. Latest Observations: March 2012 for PMI, February 2012 for IP. 20 Capital and Labor Fixed Capital Formation* Labor Market Participation Rate* (Percent, Ratio to GDP with current prices) (Percent, Seasonally Adjusted) Source: TURKSTAT, CBRT. *Annualized. Source: TURKSTAT, CBRT. 21 Employment Annual Average Employment Growth* (2007-2010) Source: WEO, Turkstat, CBRT. *Difference of natural logarithms. 22 Unit Labor Cost Unit Labor Cost (Hourly wage payments/ productivity) (Real*, Seasonally Adjusted, 2008=100) Employment Prospects and Employment (Percent, 3 month moving averages) Source: CBRT 24 INFLATION 25 Inflation Inflation in Turkey vs. Emerging Markets (Percent, Weighted Average) 30 25 20 15 Turkey 10 5 Emerging Markets 0 Source: CBRT and Bloomberg. Emerging Market Economies: China, Brazil, India, Mexico , Russia, Turkey, Poland, Indonesia, S. Africa, Argentina, Thailand, Malaysia, Czech Rep., Colombia, Hungary, Romania, Ukraine, Vietnam, Chili, Peru, Egypt, Morocco, Lebanon and S. Arabia. *2012 and 2013 end year values are from Consensus Forecast. 26 Inflation Expectations Medium Term Inflation Expectations Source: CBRT. * CBRT Survey of Expectations. 27 Inflation Forecasts and Realizations Source: CBRT. * Shaded region indicates the 70 percent confidence interval for the forecast. 28 Summary • • • • • • Rebalancing between the domestic and external demand continues as envisaged. The highest level in current account deficit was seen in October 2011. The improvement will continue in the coming months. Growth will remain moderate throughout 2012. Inflation will peak in this month and it will fall significantly in May. The fall will resume and accelerate in the last months of the year. The Central Bank strictly prefers revising its policy stance to revising its inflation forecast. All policy actions will remain geared to attain the 5% inflation target by mid-2013. 29 Recent Developments in Monetary Policy, Inflation and External Balance Mehmet Yorukoglu Deputy Governor April 2012