Download 1. Overview

Central Bank of the Republic of Turkey
1. Overview
Since the publication of the October 2011 Inflation Report, concerns over
sovereign debt sustainability across the Euro Area have continued to weigh on
the global economic outlook despite the adopted policy measures. Growth
forecasts were revised downwards at a global scale particularly in the Euro
Area. Thus, expectations for a further delay in the normalization of monetary
policy in advanced economies grew stronger. Despite a relative improvement
in the risk appetite as of the onset of 2012, uncertainties regarding the solution
of the Euro Area problems persist. Coupled with the increased risk of contagion,
this feeds into fragility in global financial markets, confirming the significance of
adopting a flexible monetary policy framework.
1.1. Monetary Policy Implementation and Monetary
Conditions
In the face of heightened macro financial risks in the first half of 2011, the
Central Bank of the Republic of Turkey (CBRT) opted for gradually leading the
economy towards a more balanced growth composition. Accordingly, in order
to bring loan growth rates to reasonable levels, necessary measures were taken
with the support of other institutions, while also reacting to excessive exchange
rate deviations from economic fundamentals on either side (Charts 1.1.1
and 1.1.2).
Chart 1.1.1.
Chart 1.1.2.
TL and Emerging Market Currencies*
Loan Growth Rates*
(10.01.2010=1)
Turkey
(13-Week Average, Annualized, Percent)
2012
2007-2010 Average
2011
Emerging Economies
1.4
60
1.34
50
1.28
40
1.22
30
1.16
1.1
20
1.04
10
0.98
Inflation Report 2012-I
Dec
Nov
Oct
Sep
Aug
July
Apr
May
March
Jan
0112
1211
1111
1011
0911
0811
0711
0611
0511
0411
0311
0211
0111
1210
1110
* Average of emerging market currencies including Brazil, Chile,
Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia,
South Korea and Colombia, against USD. Increases denote
depreciation of the currency.
Source: Bloomberg, CBRT.
Feb
0
0.92
*Adjusted for the exchange rate effect.
Source: CBRT.
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Central Bank of the Republic of Turkey
Data releases for 2011 point that the balancing of the economy has
started as anticipated. Accordingly, the contribution of net exports to growth
increased notably in the second half of the year, while the current account
balance posted a remarkable improvement (Chart 1.1.3).
Chart 1.1.3.
Current Account Balance
(Seasonally Adjusted, Billion USD)
10
Current Account (excl. energy)
Current Account
5
0
-5
-10
-15
-20
-25
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 1 2 3 4 1 2 3 4*
2003
2004
2005
2006
2007
2008
2009
2010
2011
* Estimate for December.
Source: TurkStat, CBRT.
Despite attaining desired outcomes regarding macro financial risks,
soaring inflation in the last quarter required a revision in the monetary policy
stance. The ongoing deterioration in the global risk appetite as of August led to
an excessive depreciation in the Turkish lira, posing risks on the inflation outlook.
In addition, high price adjustments in administered products in October caused
a more-than-anticipated rise in short-term inflation. In order to prevent
deterioration in inflation expectations, the CBRT has delivered an important
tightening in monetary policy since October. Accordingly, the interest rate
corridor was widened upwards and the average funding cost was raised
significantly by adjusting the amount of TL funding through 1-week repo
auctions, when deemed necessary (Chart 1.1.4).
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Inflation Report 2012-I
Central Bank of the Republic of Turkey
Chart 1.1.4.
CBRT Policy Mix
CBRT Policy Rates and O/N Repo Rates
CBRT Funding and Average Interest Rate
Outstanding Funding (Billion TL)
Interest Rate Corridor
14
12
1-week Repo Rate
80
ISE O/N Repo Rates
70
Average Funding Rate (right axis)
14
12
60
10
10
50
8
8
40
6
6
30
4
4
20
Source: CBRT.
0112
1211
1111
1011
0911
0811
0112
1211
1111
1011
0911
0811
0711
0611
0511
0411
0211
0311
0
0111
0
1210
0
1110
2
1010
10
0910
2
Source: CBRT.
The Monetary Policy Committee (MPC) noted that the tight monetary
policy stance should be maintained for a while to ensure that the inflation
outlook is consistent with the medium term targets. The MPC also stated that
keeping the flexibility of the monetary policy is necessary given the ongoing
uncertainties regarding the global economy.
The currently downward sloping yield curve points to a tight monetary
policy stance (Chart 1.1.5). Additionally, loan interest rates have recorded a
notable increase since October (Chart 1.1.6). Hence, loan growth rate declined
to more reasonable levels towards the year-end (Chart 1.1.2).
Chart 1.1.5.
Chart 1.1.6.
Yield Curve*
Consumer and TL Business Loan Rates
(Flow, 4-Week Average, Percent)
January 25, 2012
October 19, 2011
Consumer Loans
20
10
18
9.5
16
9
14
8.5
12
8
10
7.5
TL Business Loans
* Calculated from the compounded returns on bonds quoted in ISE
Bonds and Bills Market by using Extended Nelson Siegel (ENS) method.
Source: ISE, CBRT.
Inflation Report 2012-I
0112
1111
0911
0711
0511
0311
4
0111
3.5
1110
3
0910
2
2.5
Maturity (year)
0710
1.5
0510
1
0310
8
0.5
0110
Yield (percent)
10.5
Source: CBRT.
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Central Bank of the Republic of Turkey
In sum, the last quarter of 2011 was marked by ongoing tightening in
monetary and financial conditions and a pronounced deceleration in loans.
1.2. Macroeconomic Developments and Main
Assumptions
Inflation
Having climbed to 10.45 percent at end-2011, inflation remarkably
exceeded the October forecasts amid more-than-envisaged increases in
unprocessed food prices. The ongoing depreciation of the Turkish lira as a result
of the deterioration in the risk appetite was another factor leading to a
deviation in short-term forecasts (Chart 1.2.1).
Chart 1.2.1.
October 2011 Inflation Forecasts and Realizations
Forecast Range*
Uncertainty Band
Actual Inflation
Year-End Inflation Targets
12
10
Percent
8
6
4
2
1212
0912
0612
0312
1211
0911
0611
0311
1210
0910
0
* Shaded region indicates the 70 percent confidence interval for the forecast.
Owing to the lagged effects of the exchange rate developments, core
inflation indicators remained on the rise during the final quarter (Chart 1.2.2).
Meanwhile, underlying services inflation followed a moderate course, indicating
that the secondary effects were limited (Chart 1.2.3).
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Inflation Report 2012-I
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 Core Goods and Services
(Seasonally Adjusted, 3-Month Average,
Annual Percent Change)
(Seasonally Adjusted, 3-Month Average,
Annual Percent Change)
SCA-H
Services
SCA-I
Core Goods
20
20
15
15
10
10
5
5
0
0
-5
Source: TurkStat, CBRT.
1211
0611
1210
0610
1209
0609
1208
0608
1207
0607
1206
0606
1205
1211
0611
1210
0610
1209
0609
1208
0608
1207
0607
1206
0606
1205
-10
0605
-5
Source: TurkStat, CBRT.
Supply and Demand Developments
Gross Domestic Product (GDP) data pointed that domestic demand
proved stronger in the third quarter of 2011, compared to the outlook presented
in the October Inflation Report (Chart 1.2.4). Thus, output gap forecasts were
revised upwards in this period. Growth was balanced further as expected
(Chart 1.2.5). Despite the weak course of the global economy, exports
continued to increase, while the demand for imported goods and services
sustained a fall. Consequently, the net external demand contributed positively
to annual growth for the first time after an extended period.
Indicators in the last quarter of 2011 point that final domestic demand
remains flat and the balancing of the economy is ongoing as envisaged. Owing
to the monetary tightening, final domestic demand is expected to grow
moderately in the forthcoming period, as suggested by the recent loan and
orders data (Chart 1.1.2). Accordingly, inflation forecasts are based on the
assumption for a further deceleration in domestic demand by early 2012.
Inflation Report 2012-I
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Central Bank of the Republic of Turkey
Chart 1.2.4.
Chart 1.2.5.
Final Domestic Demand
Exports and Imports of Goods and Services
(Seasonally Adjusted, 2008Q1=100)
(Seasonally Adjusted, 1998 Prices, Billion TL)
October 2011 Forecast
115
Exports
10
Final Domestic Demand
Imports
9.5
110
9
105
8.5
8
100
7.5
95
7
90
6.5
6
85
5.5
5
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*
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2006
2007
2008
2009
2010
2005
2011
2006
2007
2008
2009
2010
2011
* Estimate.
Source: TurkStat, CBRT.
Source: TurkStat, CBRT.
Growth forecasts were revised significantly downwards, especially for the
Euro Area, in the inter-reporting period. Thus, projections on export-weighted
global growth index for Turkey also point to a slower pace of growth for external
demand (Chart 1.2.6). Hence, inflation forecasts are based on an outlook of
weaker external demand conditions compared to the previous period.
Chart 1.2.6.
Export-Weighted Global Economic Activity Index*
(2009Q1=100)
111
October 2011
January 2012
109
107
105
103
101
99
1
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
1
2
3
2011
4
1
2
3
4
2012
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
In sum, the output gap was revised upwards for the second half of 2011
amid the stronger-than-anticipated economic activity in the third quarter.
However, due to deterioration of the global growth outlook, aggregate
demand conditions are expected to provide a stronger support to disinflation in
the medium term compared to the previous reporting period.
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Inflation Report 2012-I
Central Bank of the Republic of Turkey
Commodity and Food Prices
Assumptions for commodity and oil prices were revised slightly upwards.
Considering the recent developments and futures prices, assumptions for oil
prices were revised upwards from USD 100 to USD 110 per barrel for 2012, and to
USD 105 for 2013. Accordingly, assumptions for import prices were also revised
slightly upwards (Chart 1.2.7). In addition, the assumption for annual food
inflation remained unchanged at 7.5 percent throughout the forecast horizon.
Chart 1.2.7.
Revisions to Oil and Imports Price Assumptions
Oil Prices (USD/bbl)
October 2011
Import Prices (2003=100)
January 2012
October 2011
135
January 2012
190
125
180
115
105
170
95
160
85
75
150
65
140
55
45
Source: Bloomberg, CBRT.
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
1213
0613
1212
0612
1211
0611
1210
0610
1209
0609
130
Source: TurkStat, CBRT.
Fiscal Policy and Tax Adjustments
Regarding fiscal policy, the medium-term inflation forecasts take the
outlook presented in the Medium Term Program (MTP) as given. Therefore, the
baseline scenario envisages no significant change in the ratio of primary
expenditures to GDP, while assuming that the public debt to GDP ratio will
continue to fall. On the other hand, baseline scenario envisages that tobacco
prices will remain unchanged throughout 2012. For 2013, tobacco prices are
assumed to increase in tandem with the tax adjustments in October 2011.
Moreover, other tax adjustments and administered prices are assumed to be
consistent with the inflation targets and automatic pricing mechanisms.
Inflation Report 2012-I
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Central Bank of the Republic of Turkey
1.3. Inflation and Monetary Policy Outlook
Forecasts are based on the assumption that tight monetary policy stance
will be sustained for a while, hence, annual loan growth rate will hover around
15 percent and the Turkish lira will appreciate mildly. Accordingly, inflation is
expected to be, with 70 percent probability, between 5.1 and 7.9 percent with
a mid-point of 6.5 percent at the end of 2012, and between 3.3 and 6.9 percent
with a mid-point of 5.1 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*
Uncertainty Band
Year-End Inflation Targets
Output Gap
12
10
Control
Horizon
8
Percent
6
4
2
0
-2
1214
0914
0614
0314
1213
0913
0613
0313
1212
0912
0612
0312
1211
0911
0611
0311
1210
-4
* Shaded region indicates the 70 percent confidence interval for the forecast.
In sum, demand and cost conditions have remained virtually unchanged
in the inter-reporting period, while inflation forecasts for end-2012 were revised
upwards due to higher initial values.
Cumulative increases in the exchange rate and commodity prices
coupled with surging unprocessed food prices and soaring administered prices
pushed inflation higher in 2011. Inflation is projected to remain flat in the first
quarter, and assume a gradual downtrend starting from the second quarter
(Chart 1.3.1). The tight monetary policy stance implemented by the CBRT since
October is expected to contain the secondary effects, thus causing inflation to
follow a downward trend as the accumulated effects of the temporary price
changes on annual inflation fade away gradually. Accordingly, inflation is
estimated to display a sharp decline particularly in the last quarter of 2012.
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Inflation Report 2012-I
Central Bank of the Republic of Turkey
In view of the unfavorable fluctuations in the economic activity likely to
be brought about by lowering inflation from 10.45 percent to 5 percent within
12 months, the baseline scenario envisages a time span of about 18 months to
bring inflation back to the target. In other words, inflation is envisioned to reach
the target of 5 percent by mid-2013 (Chart 1.3.1). However, the target might
also be reached by the end of 2012, should the risk appetite improve markedly
in the forthcoming period and the capital flows to emerging economies reaccelerate, leading to a stronger-than-expected appreciation of the Turkish
lira.
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
Inflation will remain elevated in the short term, posing risks regarding the
secondary effects. The cumulative rate of increase in the consumer prices,
which will continue to reflect on inflation till the last quarter of 2012, hit 5.66
percent in the last quarter of 2011. Annual inflation, measured as the 12-month
rate of change in prices, is expected to remain significantly above the target
until the year-end, even if the underlying inflation falls back to levels consistent
with the target. Although the monetary tightening by the CBRT since October
has contained the secondary effects, inflation expectations and the pricing
behavior will be monitored closely in the upcoming period, and necessary
measures will be taken to keep medium-term inflation outlook consistent with
the target.
Uncertainties regarding global economy will remain critical, thus requiring
flexibility in monetary policy. The baseline scenario underlying the medium-term
projections assumes that problems in the Euro Area will be solved gradually with
no further deterioration in the global outlook. However, the probability that the
solution of the Euro Area problems may be protracted and painful poses
downside risks regarding global growth and risk appetite. On the other hand,
perceptions regarding global economic outlook may turn more favorable than
expected, should the measures taken towards the solution be finalized sooner
and more decisively than envisaged. Accordingly, the risk appetite may
Inflation Report 2012-I
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Central Bank of the Republic of Turkey
improve amid the ongoing quantitative easing policies pursued by major
central banks, accelerating capital flows to emerging economies. Overall, the
ongoing Euro Area problems and uncertainties about the effectiveness of the
adopted measures imply further volatility in the global financial markets in the
forthcoming period, thus necessitating a flexible monetary policy, which utilizes
multiple instruments. 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 dampens
commodity prices, the recently manifesting problems regarding oil supply pose
upside risks to energy prices. Should such a risk materialize, the CBRT will not
react to temporary price movements, yet will not tolerate any deterioration on
expectations.
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.
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.
Strengthening the structural reform agenda that would ensure the sustainability
of the fiscal discipline, thereby reducing the saving deficit will contribute to the
relative improvement of Turkey’s sovereign risk and support price and the
financial stability. Making progress in this direction will also provide room for
monetary policy maneuver, and support the social welfare by keeping interest
rates 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-I