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Central Bank of the Republic of Turkey
1. Overview
In the first quarter of 2012, global economic activity continued to slow
down as projected, while global risk appetite improved notably on easing
concerns over the Euro Area. The prevention of a disorderly Greek default amid
the completion of debt restructuring, as well as ECB’s embarking on another
round of 3-year liquidity operation, partially improved perceptions over the Euro
Area debt crisis. Furthermore, the better-than-expected outlook in the U.S.
economy also contributed to the air of confidence. As a result, global risk
appetite was heightened, thereby accelerating capital flows to emerging
economies in the first quarter of the year. However, the recent resurge of bond
yields amid mounting concerns over the Spanish economy, as well as the lowerthan-anticipated rise in the U.S. employment, interrupted the improvement of
perceptions about the global economy. Consequently, capital flows to
emerging economies have been more volatile as of early second quarter.
Developments in the inter-reporting period indicate ongoing fragilities in
the global financial markets. Despite the 4-year period since the outbreak of
the global crisis, advanced economies are still going through deleveraging. The
problems in the Euro Area, uncertainties regarding the U.S. economy and China
as well as supply-side risks on energy prices are still present. Moreover, debt
markets remain stagnant and concerns over financial market actors are
heightened even in a period of rapidly surging asset prices and loose monetary
policy stance, thereby suggesting persistent volatility in global risk perceptions,
thus confirming the significance of adopting a flexible monetary policy
framework.
1.1. Monetary Policy Implementation and Monetary
Conditions
Against heightening macro financial risks in the first half of 2011, the
Central Bank of the Republic of Turkey (CBRT) aimed at steering the economy
gradually towards a more balanced growth composition. Accordingly, in order
to slow down loan growth, necessary measures were adopted with the support
of other institutions. Moreover, policies were implemented against excessive
deviation of exchange rates from economic fundamentals in either direction
(Charts 1.1.1 and 1.1.2).
Inflation Report 2012-II
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Central Bank of the Republic of Turkey
Chart 1.1.1.
Chart 1.1.2.
TL and Emerging Market Currencies*
Consumer Loan Growth
(11.01.2010=1)
(Adjusted for Exchange Rate, 13-Week Average,
Annualized, Percent)
Turkey
2011
Emerging Economies
1.4
2012
2007-2011 Average
60
1.34
50
1.28
40
1.22
1.16
30
1.1
20
1.04
10
* Emerging economies include Brazil, Chile, Czech Republic,
Hungary, Mexico, Poland, South Africa, Indonesia, South Korea,
Colombia and Turkey. Increases denote depreciation of the
currency.
Source: Bloomberg, CBRT.
Dec
Nov
Oct
Sep
Aug
Jul
Jun
Apr
May
Mar
0
Jan
1110
1210
0111
0211
0311
0411
0511
0611
0711
0811
0911
1011
1111
1211
0112
0212
0312
0412
0.92
Feb
0.98
Source: CBRT.
New data releases in the inter-reporting period indicate that the
balancing process in the economy continues as envisaged. Accordingly, loan
growth has slowed down significantly since the second half of 2011, thereby
improving the current account balance remarkably (Chart 1.1.3). Domestic
demand growth was controlled in this period, while the contribution of net
exports increased markedly (Chart 1.1.4). In other words, the composition of
growth assumed a robust outlook.
Chart 1.1.3.
Chart 1.1.4.
Current Account Balance
Contribution of Net External Demand to Annual
GDP Growth (Percent)
(Seasonally Adjusted, Billion USD)
Current Account
Current Account (excl. energy)
Imports
Exports
Net Exports
4
2000
1000
2
0
-1000
0
-2000
-2
-3000
-4000
-4
-5000
-6000
-6
-7000
-8
-8000
1
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1*
2007
* As of February.
Source: TurkStat, CBRT.
2
2008
2009
2010
2011 2012
20102011
2
3
2010
4
1
2
3
2011
4
1*
2012
* Estimate.
Source: TurkStat, CBRT.
Inflation Report 2012-II
Central Bank of the Republic of Turkey
Having achieved the desired outcomes with respect to alleviating macro
financial risks, monetary policy has focused on maintaining price stability as of
October 2011. The cumulative effects of the rises in import prices and the
depreciation of the Turkish lira, tax adjustments in administered prices (tobacco
and energy items) and hikes in unprocessed food prices led to a surge in
inflation in the last quarter of the year. Although these developments are mostly
temporary, the resulting high inflation brought about the risk of deterioration in
inflation expectations. Accordingly, in order to prevent a worsening in the
pricing behavior, the CBRT has implemented a strong monetary tightening as of
October, by widening the interest rate corridor upwards and effectively using
the liquidity operations (Charts 1.1.5 and 1.1.6).
Chart 1.1.5.
Chart 1.1.6.
CBRT Policy Rate and the Interest Rate Corridor
CBRT Funding and the Average Funding Rate
(Percent)
(Percent)
Interest Rate Corridor
Outstanding Funding (Billion TL)
80
14
12
14
Average Funding Rate (right axis)
1-week Repo Rate
70
Adoption of 1-week repo rate
as the policy rate
12
60
10
10
50
8
8
40
6
6
30
4
4
20
Source: CBRT.
0412
0312
0212
0112
1211
0
1111
0
1011
2
0911
0412
0212
1211
1011
0811
0611
0411
0211
1210
1010
0810
0610
0410
0210
0
10
0811
2
Source: CBRT.
Utilizing the flexibility offered by the interest rate corridor, an additional
monetary tightening has been delivered three times since October (in
December, March and April) (Chart 1.1.6). During the episodes of additional
monetary tightening, the CBRT significantly raised the average cost of liquidity
provided to the market by reducing the funding supplied through quantity
auctions. On the other hand, the upper limit on the interest rate corridor was
slightly lowered in February, following the heightening in the global risk appetite
owing to the improvement in perceptions regarding the Euro Area debt crisis
(Chart 1.1.5). In the meantime, the CBRT still maintained its tight monetary policy
stance. Accordingly, in April, the MPC underlined that additional monetary
tightening might be implemented more frequently in order to prevent a
deterioration in the inflation outlook that may be driven by price adjustments to
Inflation Report 2012-II
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Central Bank of the Republic of Turkey
energy items and other temporary factors. In addition, the MPC stated that it
would be appropriate to preserve flexibility in monetary policy in the event that
uncertainties regarding the global economy persist.
Keeping the interest rate corridor wide, while occasionally implementing
additional tightening ensures a tight monetary policy stance. As a matter of
fact, the downward slope of the yield curve and the slowdown in consumer
loan growth rates as well as the relatively high interest rates on loans confirm
that monetary and financial conditions are tight (Charts 1.1.7 and 1.1.8).
Chart 1.1.7.
Chart 1.1.8.
Yield Curve*
Consumer Loan Rates
(Flow, Annualized, Percent)
January 26, 2012
Automobile
April 20, 2012
Personal
22
10
Housing
Narrowing of the
Interest Rate Corridor
9.5
17
BRSA Measures
9
12
8.5
* Calculated from the compounded returns on bonds quoted in ISE
Bonds and Bills Market by using Extended Nelson Siegel (ENS) method.
Source: ISE, CBRT.
0412
0312
0212
0112
1211
1111
1011
0911
4
0811
3.5
0711
3
0611
2.5
0511
2
Maturity(year)
0411
1.5
0111
1
0311
7
0.5
0211
Yield (percent)
Widening of the
Interest Rate Corridor
Source: CBRT.
1.2. Macroeconomic Developments and Main Assumptions
Inflation
In the first quarter of 2012, inflation remained in tandem with the January
Inflation
Report
projections,
standing
at
10.43
percent
at
end-March
(Chart 1.2.1). The higher-than-envisioned increases in oil prices in this period
drove energy prices above projections. In the meantime, unprocessed food
prices followed a more favorable course than envisaged.
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Inflation Report 2012-II
Central Bank of the Republic of Turkey
Chart 1.2.1.
January 2012 Inflation Forecasts and Realizations (Percent)
12
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Actual Inflation
10
8
6
4
2
1212
0912
0612
0312
1211
0911
0611
0311
1210
0
* Shaded region indicates the 70 percent confidence interval for the forecast.
As the cumulative effects of exchange rate movements faded, the
annual core inflation trended downwards in the first quarter of the year.
Meanwhile, prices of services maintained a mild course (Chart 1.2.2). Against
these developments, core inflation indicators exhibited a downward trend after
an extended period (Chart 1.2.3).
Chart 1.2.2.
Chart 1.2.3.
Prices of Core Goods and Services
Core Inflation Indicators SCA-H and SCA-I
(Annual Percent Change)
(Annual Percent Change)
Core Goods
14
H SCA-H
Services
ISCA-I
12
12
10
10
8
8
6
6
4
4
Source: TurkStat, CBRT.
0312
0811
0111
0610
1109
0409
0908
0208
0707
1206
0506
0305
0312
1211
0911
0611
0311
1210
0910
0610
0310
1209
0909
0609
0
0309
-2
1208
2
0908
0
1005
2
Source: TurkStat.
Supply and Demand
National income data regarding the last quarter of 2011 indicate that
aggregate demand conditions were broadly in line with the outlook presented
in the January Inflation Report. Economic activity, which continued to
decelerate owing to weaker domestic demand, sustained its growth at a slower
pace due to the positive contribution of net exports (Chart 1.2.4).
Inflation Report 2012-II
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Central Bank of the Republic of Turkey
Chart 1.2.4.
GDP and the Final Domestic Demand
(Seasonally Adjusted, 2008Q1=100)
GDP
115
Final Domestic Demand
110
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 1 2 3 4
2005
2006
2007
2008
2009
2010
2011
Source: TurkStat, CBRT.
Industrial production data regarding early-2012 indicate that economic
activity was weaker than expected in the first quarter of the year. Nevertheless,
this is considered to stem largely from temporary factors like unfavorable
weather conditions and uncertainties regarding global economy. Hence, a
mild recovery is expected as of the second quarter. Indeed, the upward course
of the indicators on orders and consumption goods for February and March
points that the decline in the economic activity is temporary.
In the first quarter of the year, the indicators for the global economy and
external demand were also in line with the expectations. Growth rates in both
advanced and emerging economies continued to slow down, while the Euro
Area growth outlook especially remained weak.
In sum, the outlook for domestic and external economic activity
remained broadly unchanged in the inter-reporting period. Accordingly, as in
the previous reporting period, inflation forecasts are based on the assumption
that the economy will assume a mild path of growth by the second quarter and
aggregate demand conditions will continue to support the fall in inflation.
Commodity, Import and Food Prices
Since the publication of the January Inflation Report, oil prices remained
significantly above the assumed path due to supply-side developments
(Chart 1.2.5). Accordingly, oil price assumption, which was USD 110 per barrel in
the previous reporting period, was increased to USD 120 per barrel for 2012, and
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Inflation Report 2012-II
Central Bank of the Republic of Turkey
USD 115 per barrel for 2013. The contribution of this revision to the inflation
forecast for end-2012 was 0.4 percentage points on the upside. On the other
hand, in tandem with the decline in non-energy import prices, import price
index displayed a better-than-expected course (Chart 1.2.5), pulling down the
inflation forecast for end-2012 by around 0.2 percentage points. Meanwhile,
import price projections based on commodity futures remained broadly
unchanged in the inter-reporting period.
Chart 1.2.5.
Revisions to Oil and Import Price Assumptions*
Oil Prices (USD/bbl)
January 2012
135
Import Prices (2003=100)
January 2012
April 2012
April 2012
190
125
180
115
105
170
95
160
85
75
150
65
140
55
45
* Shaded region indicates the forecast period.
Source: Bloomberg, CBRT.
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
130
* Shaded region indicates the forecast period.
Source: TurkStat, CBRT.
In sum, despite the better-than-expected prices in non-energy imports in
the first quarter of the year, import prices slightly pulled up the inflation forecast
for end-2012, due to the upward revision in energy prices, which have a
stronger effect on the consumer price index. Meanwhile, the assumption for
annual food inflation was maintained as 7.5 percent throughout the forecast
horizon.
Fiscal Policy and Tax Adjustments
Regarding the fiscal outlook, the medium-term inflation forecasts take the
revised projections of the MTP as given. Hence, the baseline scenario envisages
that the ratio of primary expenditures to GDP will remain flat, and the structural
budget balance will not deteriorate. Moreover, the stipulated tax cuts and
government incentives within the new incentive system, which was publicly
announced on April 5, are considered to have no adverse effects on the fiscal
balance.
Inflation Report 2012-II
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Central Bank of the Republic of Turkey
Tobacco prices are assumed to remain constant throughout 2012 amid
tax adjustments to tobacco products in October 2011, while increasing in
January 2013 as implied by the tax adjustments in October 2011. Furthermore,
other tax adjustments and administered prices are assumed to be consistent
with the inflation targets and automatic pricing mechanisms.
1.3. Inflation and Monetary Policy Outlook
Forecasts are based on the assumption that additional monetary
tightening will be implemented more frequently, and consequently, annualized
loan growth rate will hover around 14 percent. Accordingly, inflation is
expected to be, with 70 percent probability, between 5.3 and 7.7 percent (with
a mid-point of 6.5 percent) at the end of 2012, and between 3.4 and 7.0
percent (with a mid-point of 5.2 percent) at the end of 2013. Inflation is
expected to stabilize around 5 percent in the medium term (Chart 1.3.1).
Chart 1.3.1.
Inflation and Output Gap Forecasts
Forecast Range*
Year-End Inflation Targets
Uncertainty Band
Output Gap
12
10
Control
Horizon
8
Percent
6
4
2
0
-2
0315
1214
0914
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
-4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Overall, notwithstanding the adverse effect of the upward revisions to
energy prices in 2012, the year-end inflation forecast was kept unchanged at
6.5 percent, envisioning that an additional monetary tightening would be
implemented to counterbalance this effect. In this respect, the inflation forecast
is based on the assumption that loans will grow milder, and aggregate demand
conditions will further support disinflation compared to the previous reporting
period.
Inflation is expected to follow a highly volatile course in the second
quarter. The direct effects of electricity and natural gas price hikes in April will
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Inflation Report 2012-II
Central Bank of the Republic of Turkey
be around 0.5 percentage points to consumer inflation. Therefore, inflation will
temporarily increase, reaching its peak in April. Due to base effects in
unprocessed food prices, annual inflation is expected to display a sharp fall in
May, while increasing back in June (Chart 1.3.1).
Inflation is expected to follow a downward course, as the tight monetary
policy implemented by the CBRT since October contains the second round
effects, and hence, the cumulative impacts of the temporary price movements
taper off. Accordingly, inflation will decline gradually starting from the third
quarter, assuming a markedly downward trend by the final quarter of the year
(Chart 1.3.1).
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 high course of inflation and the recent deterioration in the short-term
inflation expectations pose risk on the pricing behavior. Due to sharp price
increases in the third quarter of 2011, inflation is envisioned to remain
remarkably above the target until the last quarter of 2012, requiring a close
monitoring of the pricing behavior. Although the delivered monetary tightening
of the CBRT since October, besides mild domestic demand conditions have
alleviated upside risks on inflation by containing secondary effects, inflation
expectations will be cautiously and carefully monitored in the upcoming period,
and necessary measures will be taken to keep medium-term inflation outlook
consistent with the target.
Ongoing uncertainties regarding global economy require further flexibility
in monetary policy against volatility in capital flows. Notwithstanding the
alleviating concerns regarding the Euro Area sovereign debt problem in the first
quarter of 2011, the unfavorable course of growth as well as the currently
elevated borrowing costs across the region keep debt sustainability debates
alive. Moreover, ongoing deleveraging in the Euro Area banking system feeds
into financial fragilities, increasing the probability of a renewed deterioration in
the risk appetite. On the other hand, the risk appetite may recover faster than
Inflation Report 2012-II
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Central Bank of the Republic of Turkey
expected, should problems regarding the global economy are solved sooner
and more decisively than envisaged. Overall, the possibility that global capital
flows will continue to be volatile in the forthcoming period confirms the
appropriateness of the existing flexibility in the monetary policy framework.
Hence, the CBRT will continue to monitor global developments closely, and
take the required measures promptly.
Another risk factor in the forthcoming period is the uncertainty regarding
oil prices. Although the weak course of the global economy largely contains the
upside risks to commodity prices, ongoing supply-side problems pose upside risk
to energy prices in the short term. Should such a risk materialize, the CBRT will
not react to temporary price movements, yet will not tolerate any deterioration
in expectations.
Unprocessed food prices pose downside risk to inflation outlook over 2012.
The probability for a downward correction in unprocessed food prices after
hitting the recent-high in end-2011, besides the favorable precipitation during
the recent months, increase the likelihood of a better-than-envisioned course
for unprocessed food prices throughout the year. Inflation may reach the target
faster than projected in the baseline scenario, should the food prices follow a
more favorable course than expected.
The CBRT monitors fiscal policy developments closely while formulating its
monetary policy. The baseline scenario forecasts of the Report are based on
the MTP framework, therefore assuming that fiscal discipline will be maintained.
A revision in the monetary policy stance may be considered, should the fiscal
stance deviate significantly from this framework, and consequently have an
adverse effect on the medium-term inflation outlook.
Strengthening the structural reform agenda that would ensure the
sustainability of the fiscal discipline and reduce the saving deficit will contribute
to the relative improvement of Turkey’s sovereign risk, thereby supporting price
stability and the financial stability. Making progress in this direction will also
provide room for monetary policy maneuver and support social welfare by
keeping interest rates of long-term government securities permanently at low
levels. In this respect, taking necessary steps towards implementation of the
structural reforms envisaged by the MTP is of utmost importance.
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Inflation Report 2012-II