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Central Bank of the Republic of Turkey
1. Overview
The global economy continued to recover gradually in the final quarter,
while downside risks in advanced economies remained a major concern. The
balance-sheet repair of financial institutions, firms, and households in advanced
economies are still continuing, thereby limiting the support of private
consumption and investment to the recovery of the economic activity. On the
other hand, the relatively less affected emerging economies are recovering
steadily amid robust domestic demand.
The growth discrepancy between advanced and emerging economies and
its implications for the Turkish economy were the key driver behind the Central
Bank of the Republic of Turkey's (CBRT) monetary policy stance in the fourth
quarter. Exceptionally loose monetary policies adopted by advanced economies
in order to eliminate downside risks to economic activity not only boosted the
global liquidity, but also stimulated the search for yield, attracting more capital
flows into emerging economies. Meanwhile, the weak recovery in advanced
economies, Turkey’s main export destination, dampened external demand
growth. Low interest rates across the globe, strong credit growth amid
increased short-term capital inflows, soaring imports and weak external demand
caused the current account deficit to widen rapidly in 2010. All of these
developments referred to as the “new normal” prompted CBRT to adopt a new
strategy that encompasses monitoring of the financial stability in addition to the
main objective of maintaining price stability. Accordingly, by diversifying its
set of policy instruments, the CBRT, as stated in the previous reports, has
started to actively use required reserves and liquidity management tools, in
addition to 1-week repo auction rate, its main policy instrument.
1.1. Inflation Developments
The October 2010 Inflation Report indicated that the increases in
unprocessed food and tobacco prices, which are beyond the control of the
CBRT, added about 5 percentage points to the annual inflation, and suggested
that these items would leave sizeable room for disinflation. Indeed, inflation
dropped by 2.83 percentage points, registering a rate of 6.4 percent and almost
reaching the year-end inflation target. As predicted in the previous Report, the
decline in inflation was due to the sharp drop in unprocessed food prices.
Accordingly, the annual rate of increase in food prices was 7.02 percent at the
Inflation Report 2011-I
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Central Bank of the Republic of Turkey
end of 2010, undershooting the October estimate of 10.5 percent. This explains
the nearly one percentage point deviation in short-term inflation forecasts. In
fact, inflation excluding unprocessed food and tobacco remained in line with
the outlook presented in the October Inflation Report (Graph 1.1.1).
Graph 1.1.1. Forecasts and Realizations
CPI
(Annual Percentage Change)
CPI Excluding Unprocessed Food and Tobacco
(Annual Percentage Change)
8
12
10
6
8
6
4
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Actual Inflation
2
Forecast Range*
Actual Inflation
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0909
0610
0
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
0310
1209
0909
0
0310
2
1209
4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Having increased as much as 4.67 percentage points over the year, the
contribution of food prices to annual inflation declined to 1.94 percentage
points at the end of the year (Graph 1.1.2). Moreover, quarterly inflation across
all goods and services items was below the average of previous years
(Graph 1.1.3).
Graph 1.1.2. Contribution to Annual CPI Inflation
14
Core Goods*
Services
Tobacco and Gold***
Food and Energy**
Graph 1.1.3. CPI by Subcategories
(Fourth-Quarter, Annual Percentage Change)
2006-2009 Average
6
2010
5
12
4
10
3
8
2
6
1
4
0
2
-1
Food
1207
0208
0408
0608
0808
1008
1208
0209
0409
0609
0809
1009
1209
0210
0410
0610
0810
1010
1210
0
Energy
Tobacco
Core
and
Goods*
Gold***
Services
CPI
* Core goods: Goods excluding food, energy, alcoholic beverages, tobacco and gold.
** Food and energy: Food, non-alcoholic beverages and energy.
*** Tobacco and gold: Alcoholic beverages, tobacco and gold.
Source: TurkStat, CBRT.
The annual rate of increase in core inflation indicators slowed quarter-onquarter during the fourth quarter (Graph 1.1.4). The base effects from the 2009
tax incentives on durable goods brought the annual rate of increase in these
indicators down in October. However, the annual rate of change in core
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
indicators edged up again in November and December. Near-term trend in core
inflation has also increased, but remained in line with medium-term targets
(Graph 1.1.5). Core inflation indicators developed by the CBRT using
alternative methods also indicate a similar underlying trend.
Graph 1.1.4. Core Inflation Indicators H and I
Graph 1.1.5. Core Inflation Indicators H and I
(Seasonally Adjusted, 3-Month Average, Annual Percentage Change)
(Annual Percentage Change)
20
10
H
9
H
I
8
15
I
7
10
6
5
5
4
3
0
2
1
0
Source: TurkStat.
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
1207
1210
1010
0810
0610
0410
0210
1209
1009
0809
0609
0409
0209
1208
-5
Source: TurkStat, CBRT.
1.2. Monetary Policy Developments
The second round of quantitative easing initiated in the last quarter of
2010 by some advanced economies and the consequent boost of capital inflows
to emerging markets have required significant changes in CBRT’s policy
strategy. Short-term capital inflows have strengthened the divergence between
domestic and external demand causing the current account deficit to widen
rapidly, thus necessitating macroprudential measures. Core inflation indicators
were in line with the medium-term inflation target leaving room for the
monetary policy to focus on financial stability. Accordingly, the CBRT has
adopted a policy mix, incorporating the active use of alternative instruments
including liquidity management facilities and reserve requirements in addition
to the short-term policy rates.
The new monetary policy strategy requires the use of multiple
instruments in order to achieve domestic and external balances simultaneously.
In this context, policy rates, liquidity management facilities, and reserve
requirement ratios are used to attain price stability and financial stability.
Hence, the Monetary Policy Committee (MPC) has stated that given the current
economic climate, the combination of lower policy rates and higher reserve
requirement ratios is the most appropriate policy mix in terms of jointly
observing financial stability and price stability.
Inflation Report 2011-I
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Central Bank of the Republic of Turkey
The MPC decided to reduce the 1-week repo auction rate, the policy rate,
from 7 percent to 6.25 percent at December 2010 and January 2011 meetings
(Graph 1.2.1). In addition to policy rate cuts, the CBRT overnight borrowing
rate was reduced by 450 basis points to 1.5 percent. The corridor between the
overnight borrowing and lending rates was widened to allow for more
fluctuations in short-term interest rates when needed. All these decisions aim to
encourage capital inflows from short-term to long-term as well as to prevent the
Turkish lira to detach from economic fundamentals.
Graph 1.2.1. Policy Rates and TL Required Reserve Ratios
CBRT Policy Rates
Required Reserve Ratios by Maturity
13
20
12
Introduction of 1-week repo rate
as the policy rate
15
10
No maturity
11
10
Up to 1 month
9
1-3 months
8
7
5
3-6 months
6
6-12 months
5
0
Longer than 1
year
0111
0910
0510
0110
0909
0509
0109
0908
0508
1110
0810
0510
0210
1109
0809
0509
0209
1108
0808
0508
0208
4
Source: CBRT.
Another issue taken into consideration when formulating the new policy
mix was to limit rapid credit growth, an important factor contributing to the
widening of the current account. In this context, reserve requirement ratios
were decided to be used as active policy instruments. During December and
January, the weighted average of the reserve requirement ratios were raised
markedly. Moreover, the reserve requirement ratios were allowed to vary by
maturities, with lower ratios for longer-term maturities (Graph 6). These
decisions aim at slowing credit growth as well as extending the maturity of the
banking system’s liabilities, thereby reducing maturity mismatches.
While formulating measures for current account deficit, the CBRT has
emphasized that the primary objective is price stability. In this context, the
MPC has highlighted that the impact of the measures that have been
implemented—and are expected to be implemented—within the new policy
framework, would result in a tighter stance. Put differently, the monetary
tightening due to increase in the weighted average of reserve requirement ratios
would more than offset the expansionary effects of the policy rate reductions.
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
1.3. Inflation and Monetary Policy Outlook
Monetary and Financial Conditions
Despite the volatile global risk sentiment in the fourth quarter, the
CBRT's rate cut decisions and the accompanying downward revisions to future
policy rate expectations had a marked impact on market rates. In fact, the
downward trend in market rates have been more pronounced since the CBRT’s
announcement in December that measured rate cuts may come about.
Therefore, the benchmark bond rate continued to hover around historic lows
(Graph 1.3.1). Moreover, the downtrend in inflation expectations has also
contributed to the decline in market rates (Graph 1.3.2).
Graph 1.3.2. 12- and 24-Month Ahead CPI Expectations*
Graph 1.3.1. Interest Rates
(Annual Percentage Change)
(Percent)
EMBI+Turkey
ISE Bonds and Bills Market Interest Rate
(benchmark, compounded, right axis)
1000
12-Month
30
10
25
9
20
8
15
7
10
6
5
5
0
4
24-Month
900
800
700
600
500
400
300
200
Source: ISE, CBRT.
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510
0710
0910
1110
0111
0
1207
100
* CBRT Survey of Expectations, second survey period results.
Source: CBRT.
The decline in market interest rates was more pronounced for shorter
maturities during the final quarter, resulting in a steeper yield curve relative to
the previous quarter. The CBRT's rate cuts caused short-term market rates to
fall quickly, while longer-term interest rates displayed only a modest decline
due to the absence of a clear signal about the future course of policy rates. Yet,
despite the volatile global risk appetite, long-term interest rates remained
historically low and relatively stable, suggesting prospects for a prolonged lowinterest-rate environment in Turkey (Graph 1.3.3).
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Central Bank of the Republic of Turkey
Graph 1.3.3. Term Structure of Market Interest Rates
Yield Curve*
(Percent)
Spread Between Long and Short-Term Interest Rates**
(Percent)
8.5
3.40
8
3.00
2.60
7.5
1.80
1.40
6.5
6
10.01.2010
1.00
01.18.2011
0.60
5.5
4
0111
3.5
1110
3
0910
2
2.5
Maturity (year)
0710
1.5
0510
1
0110
0.20
0.5
0310
Yield
2.20
7
* Calculated from the compounded returns on bonds quoted in ISE Bonds and Bills Market by using ENS method.
**Spread between 4-year and 6-month yields derived from the ENS yield curve, 5-day moving average.
Source: ISE, CBRT.
The decline in nominal market rates also affected real interest rates, as
medium-term real interest rates continued to hover at unprecedented lows.
Additionally, Turkey's real interest rates have hardly differed from those in
many other emerging economies (Graph 1.3.4).
Graph 1.3.4. Medium-term Real Interest Rates Derived from Yield on GDBS*
(Percent)
2-Year Real Rates for Turkey
2-Year Real Rates for Emerging Economies**
18
15
12
9
6
3
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
1007
0707
0
Greece
Brazil
Hungary
S. Africa
Chile
Colombia
Poland
Mexico
Romania
Indonesia
Peru
Turkey
S. Korea
Malaysia
India
Philippines
Israel
Czech Rep.
Thailand
China
11
10
9
8
7
6
5
4
3
2
1
0
-1
* 2-year real interest rates are calculated using 2-year nominal interest rates derived from the ENS yield curve, and inflation expectations from the CBRT Survey of
Expectations.
** As of January 18, 2011.
Source: ISE, Bloomberg, CBRT.
After having followed a similar trend prevailing across other emerging
market currencies in the post-crisis period, the Turkish lira has recently taken a
different path and experienced a relative depreciation. It is remarkable that this
divergence started with the rate cut signal in December and has become more
pronounced after the actual rate cuts (Graph 1.3.5).
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
Graph 1.3.5. Performance of the Turkish Lira
Currency Basket and the Risk Premium
TL and Emerging Market Currencies
(April 2010=1)
TL/Currency Basket (0.5 euro+0.5 USD)
Turkey
1.5
0.98
200
0.96
100
0.94
0110
0108
0308
0508
0708
0908
1108
0109
0309
0509
0709
0909
1109
0110
0310
0510
0710
0910
1110
0111
1.4
1
300
0111
1.6
1210
1.02
400
1110
500
1010
1.04
1.7
0910
1.06
600
0810
700
1.8
0710
1.08
0610
1.1
800
0510
1.9
900
0410
2
Emerging Economies*
1.12
0310
1000
0210
EMBI+Turkey (right axis)
2.1
* Average of emerging market currencies including Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, South Korea and Colombia.
Source: Bloomberg, CBRT.
Globally low interest rates, easy access to external funds and strong course
of the economic activity continued to help improve credit conditions in the final
quarter. As a result, the spread between loan rates and deposit rates remained at
historically low levels (Graph 1.3.6). Rapid credit growth continued amid low loan
rates and improved credit risk indicators (Graph 1.3.7). In the upcoming period, it
is critical to closely monitor the course of loans and to continue to take necessary
macroprudential measures.
Graph 1.3.6. TL Business Loan and Deposit Rates
Graph 1.3.7. Loans
(4-Week Average, Annual, Percent, 2007=100)
(2007=100)
Household Loans
Business Loans
Business Loan Rate-Deposit Rate
10
8
25
260
23
240
21
220
19
200
17
6
15
13
4
11
2
Source: CBRT.
1010
0610
0210
1009
0609
0209
1008
0608
0208
1007
0607
0207
1006
0606
0206
0
180
160
140
9
120
7
100
5
80
0107
0407
0707
1007
0108
0408
0708
1008
0109
0409
0709
1009
0110
0410
0710
1010
Business Loan Rate (right axis)
12
Source: CBRT.
In sum, monetary and financial conditions remained supportive of the
economic activity in the fourth quarter. Accordingly, the credit channel has
maintained its expansionary effect on consumption and investment.
Inflation Report 2011-I
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Central Bank of the Republic of Turkey
Aggregate Demand Outlook
Third-quarter national income data are consistent with the outlook
presented in the October Inflation Report. Following the deepening sovereign
debt crisis in European economies since May, the pace of growth slowed down
in the third quarter. While domestic demand continued to recover steadily,
external demand remained weak during this period. Thus, the divergence
between domestic and external demand growth has become more pronounced
(Graph 1.3.8).
Recent data releases indicate that the third-quarter slowdown in economic
activity is temporary. Exports increased again in the final quarter, while the
domestic demand for imported goods accelerated amid rapid credit growth and
strong course of the Turkish lira. As a result, the current account deficit
continued to widen (Graph 1.3.9).
Graph 1.3.8. Exports and Imports of Goods and Services
Graph 1.3.9. Current Account Balance
(Seasonally Adjusted, 1998 Prices, Billion TL)
Exports
(12-Month Cumulative, Million USD)
Current Account
Imports
8.5
20000
8
10000
7.5
0
7
-10000
6.5
-20000
Current Account (excl. Energy)
-30000
6
-40000
5.5
-50000
5
* Estimate.
Source: TurkStat, CBRT.
1110
0310
0709
1108
0308
0707
1106
0306
-60000
0705
2010
1104
2009
0304
2008
0703
2007
1102
2006
0302
2005
0701
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4*
Source: TurkStat, CBRT.
The slow recovery in the global economy continues to restrain economic
activity, whereas the strong domestic demand bolsters aggregate demand
growth. Indeed, the rapid pace of growth in private consumption and
investment spending that started in the fourth quarter of 2009 continued into the
fourth quarter of 2010 (Graph 1.3.10).
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
Graph 1.3.10. Private Demand
(Seasonally Adjusted, 2008Q1=100)
105
100
95
90
85
80
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4*
2005
2006
2007
2008
2009
2010
* Estimate.
Source: TurkStat, CBRT.
Ongoing economic recovery fueled by the robust domestic demand has
led to gradual improvement in employment conditions. Even though the rapid
recovery in non-farm employment since the second quarter of 2009 has paused
in the third quarter of 2010, this appears temporary as suggested by the leading
indicators. However, due to high labor force participation rates, unemployment
rates are expected to remain elevated relative to pre-crisis levels. Therefore,
unit labor costs are unlikely to face cost pressures in coming months.
To sum up, monetary conditions continue to support domestic demand.
Private demand recovered more rapidly amid increased consumption and
investment spending, therefore aggregate demand conditions provided less
support for disinflation than envisioned in the October Inflation Report. The
recent policy measures are expected to bring domestic demand back to a more
moderate growth path in the upcoming period. In light of these developments,
our revised inflation forecasts envisage a framework in which domestic demand
growth slows down gradually and external demand continues to recover, albeit
slowly. This framework, when compared to the October Inflation Report,
implies no significant difference in terms of the impact of aggregate demand
conditions on the inflation outlook.
Fiscal Policy
Our inflation forecasts are built on the projections of the Medium-Term
Program (MTP) as in the October Inflation Report. The spending of a large
fraction of the additional increases in tax revenues amid the stronger-thanInflation Report 2011-I
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Central Bank of the Republic of Turkey
expected economic activity has been the primary driver of the slight upward
revision to output gap forecasts. However, as the budget balance remained
largely in line with the MTP targets, the medium-term fiscal policy outlook
remained mainly unchanged. Hence, our forecasts are based on the assumption
that the ratio of non-interest expenditures to GDP would decline gradually,
debt-to-GDP ratio would decline further and the risk premium would remain
broadly unchanged over the forecast horizon. Furthermore, we assume that tax
adjustments would be consistent with inflation targets and automatic pricing
mechanisms.
Revisions on Main Forecast Assumptions
The October Inflation Report envisaged food inflation to be 10.5 percent
at end-2010, to fall gradually to 7 percent at end-2011 and to be stable
afterwards. The sharp decline in unprocessed food inflation resulted in a lowerthan-expected food inflation during the fourth quarter. However, the potential
impact of the recent upsurge in agricultural commodity prices on processed
food prices led to an upward revision in the food inflation assumption from 7
percent to 7.5 percent, adding 15 basis points to 2011 inflation forecasts.
In the October Inflation Report, oil prices were assumed to be 85
USD/barrel for 2011, and 90 USD/barrel for 2012 and beyond. Moreover,
given futures prices for commodities, import prices were assumed to rise
gradually over the forecast horizon, increasing by an average 6.1 percent yearon-year in 2011. Commodity prices have accelerated further since the release of
the October Inflation Report due to the ongoing quantitative easing in advanced
economies and the strong pace of growth in emerging economies. In this
context, in view of the futures prices of commodities as of the first half of
January, the oil price assumption is revised upward to 95 USD/barrel for 2011
and thereafter. Furthermore, again considering the futures prices, import prices
are assumed to increase by about 10.9 percent year-on-year in 2011 (Graph
1.3.11). These changes in assumptions led to an upward revision of 35 basis
points in 2011 inflation forecasts.
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
Graph 1.3.11. Forecasts and Revisions
Oil Prices
(USD/bbl)
Import Prices
(2003=100)
150
October 2010
210
January 2011
October 2010
130
January 2011
190
110
170
90
150
70
130
50
10
90
Source: Bloomberg, CBRT.
0103
0703
0104
0704
0105
0705
0106
0706
0107
0707
0108
0708
0109
0709
0110
0710
0111
0711
0112
0712
0113
0713
110
0103
0703
0104
0704
0105
0705
0106
0706
0107
0707
0108
0708
0109
0709
0110
0710
0111
0711
0112
0712
0113
0713
30
Source: TurkStat, CBRT.
Inflation Outlook
Since the launch of inflation targeting in 2006, the CBRT has publicly
announced its medium-term inflation forecasts and provided a qualitative
perspective regarding the policy rate outlook. The current climate required the
CBRT to observe financial stability along with price stability, and thus
necessitated the use of a variety of monetary policy instruments including
policy rates in addition to required reserves ratios and liquidity management
tools. Given the mounting uncertainties concerning the global economic
outlook in the period ahead, the future course of each instrument within the
policy mix should remain flexible. In other words, this Report will focus on the
net effect of the policy mix rather than providing an explicit path for each
policy instrument.
Against this background and assuming that the policy mix is adjusted to
deliver a limited additional tightening during the rest of 2011, inflation is
expected to be, with 70 percent probability, between 4.5 and 7.3 percent with a
mid-point of 5.9 percent at the end of 2011, and between 3.3 and 6.9 percent
with a mid-point of 5.1 percent at the end of 2012. Inflation is expected to
stabilize around 5 percent in the medium term (Graph 1.3.12).
Inflation Report 2011-I
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Central Bank of the Republic of Turkey
Graph 1.3.12. Inflation and Output Gap Forecasts*
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
12
Output Gap
Control
Horizon
10
8
6
Percent
4
2
0
-2
-4
-6
-8
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
-10
* Shaded region indicates the 70 percent confidence interval for the forecast.
In this context, assuming that a limited monetary tightening brings credit
growth rate down to 20-25 percent in 2011, our revised forecasts indicate that
inflation would converge to the target by the end of 2011. It should be noted
that the envisaged monetary tightening in 2011 may be implemented through
various combinations of policy tools. The monetary tightening could be
provided by either required reserve ratios or policy rates or a combination of
both. Moreover, during the tightening process, both instruments could move in
the same or in the opposite direction. However, the baseline scenario envisages
the net impact of the policy mix on loans and domestic demand to be
restrictive.
The rapid decline in unprocessed food prices pulled short-term inflation
forecasts down, while the upward revisions to oil and commodity price
assumptions drove end-2011 inflation forecasts higher. The output gap is
revised slightly upward for the final quarter of 2010. In addition, considering
the lagged effects of the monetary tightening, the output gap is assumed to
close more slowly than in the previous reporting period (Graph 1.3.13).
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Inflation Report 2011-I
Central Bank of the Republic of Turkey
Graph 1.3.13. Comparison of October 2010 and January 2011 Forecasts
Inflation Forecast
Output Gap Forecast
0
12
11
Realization
10
October 2010
October 2010
9
-1
January 2011
8
7
6
-2
5
4
January 2011
3
-3
2
1
2
3
4
1
2010
Source: TurkStat, CBRT.
2
3
2011
4
1
2
3
2012
4
1
2
2
3
3
4
2010
2013
1
2
3
2011
4
1
2
3
2012
4
1
2
3
2013
Source: CBRT.
Given the correction in unprocessed food prices and the high base effects
from early 2010, inflation is expected to fall markedly below medium-term
targets and to remain volatile thereafter. Inflation is expected to reach the
medium-term target of 5 percent by mid-2012 once the effects of rising
commodity prices taper off.
It should be emphasized that any new data or information regarding the
inflation outlook may lead to a change in the monetary policy stance.
Therefore, assumptions regarding the monetary policy outlook underlying the
inflation forecast should not be perceived as a commitment on behalf of the
CBRT.
1.4. Risks and Monetary Policy
The baseline scenario envisages a gradual tightening through policy mix
changes in order for inflation to remain in line with medium-term targets. Such
a tightening mainly aims at slowing down credit growth and domestic demand,
and also reducing macroprudential risks. The impact of the monetary tightening
in December and January on credit growth is expected to be materialized over
the near term. However, the timing and the extent of the transmission of the
policy mix may vary depending on the developments beyond the control of the
monetary policy. Therefore, the CBRT will closely monitor the effects of the
policy measures and take further actions should the credit growth rate or the
inflation rate deviate from the desired levels.
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Central Bank of the Republic of Turkey
Developments regarding the global economy remain central to domestic
inflation and monetary policy outlook. Under current conditions, the CBRT is
utilizing several instruments in order to monitor both price stability and
financial stability. Therefore, global developments, unlike past, not only affect
the direction of the policy instruments, but also their combination. Accordingly,
global risks will be assessed according to their effects on the pace of the
aggregate demand as well as on its composition.
Although there has been a slightly improved prospects for the US
economy, uncertainties driven by debt sustainability problems across euro area
peripheral economies still persist. Ongoing problems in credit, real estate, and
labor markets across advanced economies and the uncertainties regarding the
impact of fiscal consolidations continue to pose downside risks to the pace of
global growth. The possibility of a longer-than-anticipated period of anemic
global growth and a prolonged period of quantitative easing by advanced
economies not only feeds downside risks to external demand but also increases
the likelihood that our capital inflows may continue at a faster pace. Should
such a scenario materialize, a policy mix of low policy rate and high reserve
requirement ratios may be implemented for a long period, both for balancing
the domestic and external demand, and for easing macroprudential risks.
Moreover, an outcome whereby global economic problems intensify and
domestic economic activity contracts may require an easing in all policy
instruments.
Although downside risks are critical, upside risks to global economy are
also present. These risks are especially driven by the lagged impacts of the
exceptionally loose policies implemented by advanced economies during the
past two years. In the period ahead, should the global economy faces a fasterthan-expected recovery, global inflation may increase, thus warranting
monetary tightening in advanced economies. Materialization of such a scenario
would mean higher global interest rates and demand-pull domestic inflation,
and thus necessitate a tightening by increasing both policy rates and reserve
requirement ratios.
Oil and other commodity prices have recently displayed rapid increases.
The increases in commodity prices, if they persist, may pose risks to general
pricing behavior, given the strong pace of domestic demand. Should such a risk
materialize and hamper the attainment of the medium-term inflation targets, a
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stronger tightening may come about than envisaged in the baseline scenario.
However, the policy mix may vary depending on the developments regarding
external demand, capital flows and the credit growth outlook.
The CBRT continues to monitor fiscal policy developments closely while
formulating the monetary policy strategy. Increasing public savings under
current circumstances, and hence, adherence to fiscal discipline is essential for
controlling the mounting current account risks driven by the divergence
between domestic and external demand. Our inflation forecasts take the MTP
targets as given. Should the fiscal stance deviate significantly from this
framework and adversely affect the inflation outlook, a revision in the monetary
policy stance may be considered.
In the period ahead, monetary policy will continue to focus on achieving
price stability on a permanent basis. To this end, the impact of the
macroprudential measures taken by the CBRT and other relevant institutions on
the inflation outlook will be considered carefully. Fulfillment of the
commitments to fiscal discipline in the medium term and strengthening the
structural reform agenda will contribute to the improvement of Turkey’s
sovereign risk, and thus support macroeconomic stability as well as price
stability. Sustaining the fiscal discipline will also provide room for monetary
policy maneuver, supporting the social welfare by keeping interest rates
permanently at low levels. In this respect, timely implementation of the
structural reforms envisaged by the MTP and the European Union accession
process remains to be of utmost importance.
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Inflation Report 2011-I