Download 1. Overview

Central Bank of the Republic of Turkey
1. Overview
The global economic growth slowed down in the second quarter of 2011,
while advanced and emerging economies continued to grow at different
paces. Mounting concerns regarding sovereign debt sustainability problems
across the euro area, especially in Greece, and the slower-than-expected
recovery in the U.S. labor market has intensified the downside risks regarding the
global
economic
normalization
of
activity.
the
Accordingly,
monetary
policy
expectations
in
advanced
for
a
delay
economies
in
were
heightened. Meanwhile, emerging economies, faced with inflationary pressures
arising from strong domestic demand and elevated commodity prices,
continue to tighten monetary policy while resorting to macroprudential
measures to contain the adverse effects of the global imbalances on their
domestic markets.
1.1. Monetary
Conditions
Policy
Developments
and
Monetary
In order to restrain macro financial risks in the domestic economy posed
by rapid credit growth and widening current account deficit due to short-term
capital inflows, the Central Bank of the Republic of Turkey (CBRT) designed and
launched a new policy strategy by the end of 2010. The new policy approach
preserves the priority for price stability, while also observing financial stability as
a supporting objective. In this context, in addition to the policy rates,
complementary tools such as reserve requirement ratios and the interest rate
corridor are jointly utilized.
In order to contain risks associated with diverging domestic and external
demand and short-term capital inflows, the CBRT has kept the policy rates at
low levels, while resorting to monetary tightening through reserve requirement
hikes since the last quarter of 2010. This strategy aims to rebalance economic
growth without hampering the medium-term inflation outlook. Accordingly,
weighted average reserve requirement ratio was raised significantly and
monetary policy assumed a more cautious stance (Chart 1.1.1).
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
Chart 1.1.1. CBRT Policy Mix
CBRT Policy Rates
TL Required Reserve Ratios
O/N Lending - Borrowing Interest Rate Corridor
Maximum and Minimum Reserve Requirement Ratios
Weighted Average Reserve Requirement Ratio
1-week Repo Rate
25
18
16
20
14
Adoption of 1-week repo
rate as the policy rate
12
15
10
8
10
6
4
5
2
Source: CBRT.
0511
0311
0111
1110
0910
0710
0510
0310
0110
1109
0909
0
0709
0711
0411
0111
1010
0710
0410
0110
1009
0709
0409
0109
1008
0708
0408
0108
0
Source: CBRT.
The measures taken by the Banking Regulation and Supervision Agency
(BRSA) regarding the loan-to-value ratios, loan-loss provisions, and capital
adequacy, as well as the tight fiscal stance supported the policy mix
implemented by the CBRT, and contributed to the rebalancing of domestic and
external demand. In this respect, the impact of the policy mix has become
more evident in the second quarter.
The Monetary Policy Committee (MPC), observing the moderating
domestic economic activity and mounting uncertainties regarding the global
economy, kept the policy rate and Turkish lira reserve requirements constant
since the publication of the April Inflation Report. Moreover, in the July meeting,
the MPC, by putting an increased emphasis on global risks, stated that all policy
instruments may be eased should global economic problems intensify and lead
to a contraction in the domestic economic activity.
As a consequence of the policies implemented by the CBRT, the Turkish
lira continued to favorably diverge from currencies of peer emerging
economies (Chart 1.1.2). This development, coupled with the coordinated
measures implemented by other institutions, contributed to the rebalancing of
domestic and external demand. In fact, recent data suggest that, in real terms,
the upsurge in imports has stopped while exports continued to grow
(Chart 1.1.3).
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1.1.2.
Chart 1.1.3.
TL and Emerging Market Currencies*
Exports and Imports of Goods and Services
(October 2010 =1)
(Seasonally Adjusted, 1998 Prices, Billion TL)
Turkey
Emerging Economies
Exports
1.16
9
1.13
8.5
1.1
8
1.07
7.5
1.04
7
1.01
6.5
0611
0511
0411
0311
0211
5
0111
0.92
1210
5.5
1110
6
0.95
1010
0.98
Imports
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*
2005
* Average of emerging market currencies including Brazil, Chile,
Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia,
South Korea and Colombia, against USD.
Source: Bloomberg, CBRT.
2006
2007
2008
2009
2010 2011
* Estimate.
Source: TurkStat, CBRT.
Credit conditions continued to tighten in the second quarter due to
measures taken both by the CBRT and the BRSA (Chart 1.1.4). Although credit
growth rate has yet to decline to levels compatible with financial stability, it is
expected to slow down further in the second half of the year on lagged effects
of the ongoing tightening. In fact, consumer loan rates have displayed a
significant rise recently (Chart 1.1.5).
Chart 1.1.4.
Chart 1.1.5.
TL Business Loan Rates
TL Loan Rates
(4-Week Average, Percent)
(Percent)
Business Loan Rate - Deposit Rate
Business Loan Rate (right axis)
Automobile
Business
12
25
Housing
Personal
20
23
10
21
19
8
15
17
6
15
13
4
11
10
9
2
7
Source: CBRT.
Inflation Report 2011-III
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0110
0210
0310
0410
0510
0610
0710
0810
0910
1010
1110
1210
0111
0211
0311
0411
0511
0611
0711
0211
0611
0210
0610
1010
1009
0209
0609
1008
0208
0608
0607
1007
0207
0606
1006
5
0206
0
Source: CBRT.
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Central Bank of the Republic of Turkey
1.2.
Macroeconomic
Assumptions
Developments
and
Main
Inflation
Annual inflation, by following an upward trend, increased to 6.24 percent
in the second quarter on the accumulated impact of import prices, rising food
prices and base effects. Although inflation displayed a more volatile path than
expected due to excessive volatility in unprocessed food prices, the endquarter realization was close to the forecast presented in the April Inflation
Report (Chart 1.2.1).
Chart 1.2.1.
April 2011 Inflation Forecasts and Realizations
12
Forecast Range*
Uncertainty Band
Year-End Inflation Targets
Actual Inflation
10
Percent
8
6
4
2
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
0310
0
* Shaded region indicates the 70 percent confidence interval for the forecast.
Higher commodity prices and the depreciation of the Turkish lira
continued to weigh on core prices during the second quarter. Yet, the second
round effects were contained at this stage. Although annual core inflation
increased, seasonally adjusted data signal a recently declining trend
(Chart 1.2.2). Moreover, services inflation also hover around at historic lows
recently (Chart 1.2.3).
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
Chart 1.2.2.
Chart 1.2.3.
Core Inflation Indicators SCA-H and SCA- I
Prices of Services
(Seasonally Adjusted, 3-Month Average, Annual Percent
Change)
(Seasonally Adjusted, 3-Month Average, Annual
Percent Change)
SCA-H
SCA-I
20
16
14
15
12
10
10
8
6
5
4
0
2
-5
-2
Source: TurkStat, CBRT.
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0308
0611
0311
1210
0910
0610
0310
1209
0909
0609
0309
1208
0908
0608
0
Source: TurkStat, CBRT.
Supply and Demand Developments
The first-quarter GDP data are consistent with the outlook presented in the
April Inflation Report. Economic activity remained robust, albeit having a slower
rate of growth than in the first quarter, while the main driver of growth was
private sector demand. Meanwhile, exports remained weak and imports
continued to accelerate, causing net external demand to make a negative
contribution to growth. The divergence between domestic and external
demand growth continued during this period, vindicating a new policy mix.
Economic activity slowed down due to the lagged effects of the
tightening policies and the weak external demand. During this period, industrial
production and capacity utilization rates declined on a quarterly basis after a
long time. Therefore, our output gap estimates for the second quarter are
revised slightly downward compared to the previous reporting period.
Revisions to Other Assumptions
Although
downside
risks
to
global
economic
growth
increased,
downward revisions to global growth forecasts remained limited at this stage
(Chart 1.2.4). Accordingly, projections for Turkey's export-weighted growth index
remained broadly unchanged. Therefore, assumptions regarding external
demand conditions were not subject to any major revisions that may affect
inflation forecasts.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
Chart 1.2.4.
Export-Weighted Global Economic Activity Index*
(2009Q1=100)
111
April 2011
July 2011
109
107
105
103
101
99
1
2
3
4
1
2008
2
3
4
2009
1
2
3
4
1
2010
2
3
4
1
2011
2
3
4
2012
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
Assumptions about oil prices for 2011 and onward were kept at 115
USD/bbl, and there has been no significant revision for import price projections,
which are constructed by future commodity prices (Chart 1.2.5). Moreover,
assumption for food inflation was maintained at 7.5 percent for end-2011 and
thereafter.
Chart 1.2.5.
Revisions to Oil and Import Price Assumptions
Oil Prices(USD/bbl)
April 2011
Import Prices (2003=100)
April 2011
July 2011
135
210
125
200
115
190
105
July 2011
180
95
170
85
160
75
150
65
Source: Bloomberg, CBRT.
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
0108
0107
0713
0113
0712
0112
0711
0111
0710
0110
0709
0109
0708
120
0108
35
0707
130
0107
45
0707
140
55
Source: TurkStat, CBRT.
In sum, there has been no revision for end-2011 inflation forecast as the
outlook for factors affecting inflation remained broadly unchanged.
Fiscal Policy
Inflation forecasts are based on the assumption that the additional
revenues incurred via the restructuring of tax claims would be used to reduce
public debt, and hence, fiscal policy would tighten. It is also assumed that the
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
ratio of primary expenditures to GDP would slightly decline, the debt-to-GDP
ratio would continue to fall, and the risk premium would remain broadly
unchanged over the forecast horizon. Furthermore, tax adjustments are
assumed to be consistent with inflation targets and automatic pricing
mechanisms.
1.3. Inflation and Monetary Policy Outlook
Under the current economic climate, slowing down credit growth is not
only critical for controlling domestic demand, and therefore to contain
inflationary pressures, but also for preventing excessive borrowing, and hence,
to restrain macro financial risks. Moreover, in an environment where multiple
policy tools are jointly utilized, credit growth deserves particular emphasis with
regard to the communication of the monetary and financial conditions that
underlie our forecasts. Therefore, in addition to inflation forecasts, our
assumptions for the annual rate of credit growth will be publicly shared in this
Report.
Against this background, assuming that annual rate of credit growth
declines to 25 percent by the end of 2011, and policy rate remains constant
until the end of 2011, inflation is expected to be, with 70 percent probability,
between 5.9 and 7.9 percent with a mid-point of 6.9 percent at the end of 2011,
and between 3.5 and 6.9 percent with a mid-point of 5.2 percent at the end of
2012. 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
-4
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0610
-6
* Shaded region indicates the 70 percent confidence interval for the forecast.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
In sum, inflation forecast path remains broadly unchanged as there has
been no significant revision to our underlying assumptions compared since the
previous reporting period.
The revised forecasts suggest that credit growth should grow at a
controlled and healthy pace to keep inflation in line with the medium-term
targets. Although the rate of credit growth has not declined to desirable levels
in the second quarter, the credit growth is expected to slow down markedly
over the coming period given the lagged effects of the adopted measures by
the CBRT, as well as the measures taken by the BRSA regarding consumer
credits.
Over the second half of the year, inflation is expected to display
significant fluctuations mainly due to base effects driven by food prices. Annual
food inflation is expected to decline in the third quarter and increase in the last
quarter. As shown in Chart 1.3.1, these fluctuations will largely determine the
course of inflation.
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
Under current circumstances, risk factors and the associated monetary
policy measures are assessed within a framework where both price stability and
financial stability are observed. Accordingly, risk factors are not only assessed
with respect to their impact on the level; but also, on the composition of the
aggregate demand since the level of the aggregate demand is related to
price stability, while its composition is directly related to financial stability.
Hence, risk factors regarding global economy are also evaluated against this
backdrop.
The baseline scenario, and hence, our inflation forecasts are built on the
assumption that the second-quarter slowdown in global economic activity will
mainly be temporary, given the forecasts by international institutions. However,
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Inflation Report 2011-III
Central Bank of the Republic of Turkey
developments since the previous reporting period have intensified downside
risks regarding the global economy.
Problems in credit, real estate and labor markets in advanced economies
are yet to be fully solved. Moreover, concerns on fiscal dynamics in these
economies still persist. In particular, mounting problems regarding sovereign
debt in the euro area peripheral economies have intensified downside risks to
the global economy. Should the sovereign debt problems regarding some
European economies and the concerns on global growth continue to have
adverse impact on the risk appetite, the interest rate corridor may be narrowed
gradually. Moreover, an outcome whereby global economic problems intensify
and domestic economic activity contracts may require an easing in all policy
instruments.
Even if debt problems in the euro area are resolved before they turn into
a global crisis, it is still likely to experience a prolonged period of weak
economic activity in advanced economies coupled with continued economic
growth in emerging markets driven by domestic demand. In such a case, there
may be a resurge in short-term speculative capital inflows to emerging markets
which may render itself as weak external demand and elevated commodity
prices with rising capital inflows, feeding into macro financial risks for the
domestic economy. Should this scenario materialize, the policy mix of low policy
rates and high reserve requirements may be implemented for a long period, in
order to contain risks to price stability and financial stability.
Developments in exchange rates and import prices have been adversely
affecting core inflation since the last quarter of 2010. The additional tariffs on
fabrics and apparels are another leading factor that may lift up core inflation
indicators in the coming period. Under current circumstances, the increase in
core inflation reflects only the relative price movements while the current level
of aggregate demand contains the second round effects of these price
movements. However, core inflation is expected to increase in the forthcoming
period, posing upside risks to inflation expectations and price-setting behavior.
Should such a risk materialize and hamper the attainment of medium-term
inflation targets, the CBRT will not hesitate to tighten monetary policy. In such a
case, the mix of policy tools to be used for tightening will depend on
developments regarding domestic demand, capital flows, current account and
credit growth.
Inflation Report 2011-III
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Central Bank of the Republic of Turkey
The impact of the ongoing tightening measures on credit volume and
domestic demand is expected to be more significant during the second half of
the year. However, the extent and the timing of the impact may vary
depending on the developments beyond the control of monetary policy. The
lagged effects of the policy measures on price stability and financial stability will
be closely monitored, and further measures will be taken if deemed necessary.
The CBRT will continue to monitor fiscal policy developments closely while
formulating monetary policy. Sustaining the fiscal discipline under current
circumstances is essential to limit risks posed by the current account deficit
driven by the divergence between domestic and external demand. Saving the
additional tax revenues acquired both within the law on restructuring of public
claims and also owing to strong economic activity would not only reduce risks
to price stability and financial stability, but also increase the effectiveness of the
new policy mix. In this respect, our forecasts presented in the baseline scenario
assume that the additional budget revenues will be saved to a large extent. 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.
In the period ahead, monetary policy will continue to focus on achieving
price stability on a permanent basis, while observing financial stability. To this
end, the impact of the macroprudential measures taken by the CBRT and other
relevant institutions on the inflation outlook will be assessed 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, thereby supporting macroeconomic stability and price stability.
Sustaining the fiscal discipline will also provide room for monetary policy
maneuver, and support 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 acquis communautaire
remains to be of utmost importance.
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Inflation Report 2011-III