Download 1. O verview

Central Bank of the Republic of Turkey
1. Overview
Global monetary policy developments influenced financial markets in the
second quarter of the year. Persisting fragilities in the global economy in
addition to increased uncertainty over the monetary policies of advanced
economies led to higher volatility in the risk appetite (Chart 1.1). In particular,
the Fed’s signals for a pullback on bond purchases in the near future have
resulted in capital outflows from emerging economies as of May (Chart 1.2).
Chart 1.2
Chart 1.1
Portfolio Flows to Emerging Economies
Global Risk Appetite
((4-Week Average, Billion USD)
Credit Suisse Risk Appetite Index
6
Equity Funds
10
VIX (inverted, right axis)
Bond Funds
9
9
6
6
3
3
0
0
-3
-3
Source: Credit Suisse, Bloomberg.
0713
0113
0712
-9
0112
-9
0711
45
0111
-8
0710
-6
0110
-6
0709
40
0109
-6
0708
35
0108
-4
0713
30
0113
-2
0712
25
0112
0
0711
20
0111
2
0710
15
0110
4
Source: EPFR, Bloomberg.
As global economic activity remains weak, global growth forecasts are
revised downwards. Despite the stable growth in the US economy, the weak
course of the Euro Area economies and the slowdown in emerging economies
still persist. A recent surge in the volatility of capital flows have exacerbated the
downside risks on emerging economies through the credit and expectations
channel. In such an economic environment, maintaining a flexible monetary
policy framework with multiple instruments remains crucial in order to preserve
price stability while observing financial stability.
1.1. Monetary Policy and Monetary Conditions
Since end-2010, the CBRT has been implementing a monetary policy
framework designed to take macro financial risks into account. Accordingly,
special emphasis is placed on containing the distortionary effects of capital
flow volatility on price stability and financial stability.
Inflation Report 2013-III
1
Central Bank of the Republic of Turkey
Owing to the improved inflation outlook and strengthened capital inflows
as of the third quarter of 2012, the CBRT opted for a gradual monetary easing.
Despite occasional fluctuations stemming from the global risk appetite, liquidity
policy in this period has been largely accommodative. By providing excess
liquidity to the market, the CBRT kept overnight market rates close to the lower
band of the interest rate corridor (Charts 1.1.1 and 1.1.2). Short-term interest
rates and the CBRT average funding rate were reduced until May 2013.
Moreover, reserve options coefficients were gradually raised to alleviate the
adverse effects of capital inflows on financial stability.
Chart 1.1.1.
Chart 1.1.2.
CBRT Funding*
Policy Rate and Liquidity Policies
(Percent)
(2-Week Average, Billion TL)
BIST and Interbank Reverse Repo
Other CBRT Funding
Weekly Repo (Quantity Auction)
Monthly Repo
Net OMO
75
Interest Rate Corridor
CBRT Average Funding Rate
BIST O/N Repo Rates (10-day average)
Policy Rate
75
15
65
65
13
13
55
55
11
11
45
45
9
9
7
7
5
35
35
25
25
15
0713
0513
0313
0113
1112
0912
0712
0512
0312
0112
1111
0911
0711
0511
0713
0513
0313
0113
1112
0912
1
0712
1
0512
3
-5
0312
3
-5
0112
5
1111
15
5
0911
15
5
* Other CBRT funding includes primary dealer repo transactions, repo transactions at the BIST Repo and the Reverse Repo Market and lending depot
facility at the Interbank Money Market.
Source: BIST, CBRT.
Developments as of late May called for a change in the monetary policy
stance. Elevated uncertainties regarding global monetary policies caused rapid
capital outflows, excessive depreciation of the Turkish lira and fluctuations in
financial markets, which led the CBRT to tighten the liquidity policy by changing
the composition of the liquidity injected into the market (Chart 1.1.1). In its July
meeting, the MPC decided to raise the upper band of the interest rate corridor
by 75 basis points in order to contain the distortionary effects of rising inflation on
pricing
behavior
and
to
support
financial
stability.
Moreover,
some
arrangements were introduced to strengthen the effects of the interest rate
corridor and the liquidity policy on the days of additional monetary tightening.
The MPC stated that the monetary policy would remain cautious until the
inflation outlook aligns with the medium-term targets and reiterated that
additional monetary tightening would be implemented when deemed
necessary.
2
Inflation Report 2013-III
Central Bank of the Republic of Turkey
Meanwhile, the MPC decided to increase the flexibility of the Turkish lira
liquidity policy, highlighting the persisting uncertainties regarding the global
economy and the volatility in capital flows. The MPC emphasized that
developments regarding price stability and financial stability will be closely
monitored and necessary adjustments would be made regarding the
composition of the Turkish lira liquidity provided by the CBRT.
In line with the declining risk appetite, the tightening liquidity policy and
the rising global interest rates, nominal market interest rates increased notably
across all maturities as of July, while real interest rates also followed a similar
trend (Charts 1.1.3 and 1.1.4).
Chart 1.1.3
Chart 1.1.4.
Yield Curve*
2-Year Real Interest Rates for Turkey*
(Percent)
(Percent)
26 July
30 April
9
5
4
4
3
3
2
2
1
1
0
0
-1
-1
9
8
7
7
6
6
5
5
4
4
0.5
1
1.5
2
2.5
3
3.5
4
Maturity (year)
*Calculated from the compounded returns on bonds quoted in BIST
Bonds and Bills Market by using ENS method.
Source: BIST, CBRT.
0510
0710
0910
1110
0111
0311
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
8
Yield
5
* Calculated as the 2-year discounted bond returns derived from the
yield curve, minus the 24-month ahead inflation expectations from the
CBRT Survey of Expectations.
Source: BIST, CBRT.
Recently, loan rates have also moved upwards. While commercial loan
rates, which respond more quickly to liquidity conditions, posted an evident
increase, consumer loan rates recorded a more limited rise (Chart 1.1.5).
Deposit rates, currency swap rates, the CBRT’s average funding rate as well as
bill and bond rates issued by banks, which all represent the Turkish lira funding
costs of banks, increased as well (Chart 1.1.6).
Inflation Report 2013-III
3
Central Bank of the Republic of Turkey
Chart 1.1.5.
Chart 1.1.6.
TL Loan Rates
Funding Costs of Banks
(Percent)
Automobile
Personal
21
Housing
Commercial
21
15
15
13
13
11
11
9
9
7
7
5
5
0912
1112
0113
0313
0513
0713
17
0911
1111
0112
0312
0512
0712
19
17
1110
0111
0311
0511
0711
19
Source: CBRT.
Bills and Bonds Rate
Deposit Rate
CBRT Average Funding Rate
3 Month Currency Swap Rate
13
13
11
11
9
9
7
7
5
5
3
3
0811
0911
1011
1111
1211
0112
0212
0312
0412
0512
0612
0712
0812
0912
1012
1112
1212
0113
0213
0313
0413
0513
0613
0713
(Percent)
Source: PDP, CBRT.
Despite the recent slowdown in capital flows, credit growth remains
robust. The course of credits as of July points to a faster growth compared to
the average of past years (Chart 1.1.7). Against this backdrop, annual credit
growth rates also hover above the reference value (Chart 1.1.8). Due to
mounting uncertainties in financial markets, both credit supply and credit
demand may slow down in the forthcoming period. Nevertheless, the annual
credit growth rate is expected to exceed the reference level at end-2013.
Chart 1.1.7.
Chart 1.1.8.
Growth Rate of Loans
Annual Growth Rate of Loans
(Adjusted for Exchange Rate, 13-Week Average,
Annualized, Percent)
(Percent)
2007-2012 Average
Commercial Loans
Total Loans
Consumer Loans
2013
40
45
35
35
40
40
30
30
35
35
25
25
30
30
20
20
25
25
15
15
20
20
10
10
5
5
15
15
10
10
Source: CBRT.
Dec
Nov
Oct
Sep
Jul
Aug
Jun
Apr
May
Mar
Jan
0
Feb
0
45
1110
0111
0311
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
40
Source: CBRT.
In the second quarter of the year, financial conditions continued to be
accommodative despite a limited quarter-on-quarter tightening (Chart 1.1.9).
Financial conditions tightened further in July amid the slowdown in capital flows
as of May. In view of the cautious stance of the monetary policy, forecasts are
4
Inflation Report 2013-III
Central Bank of the Republic of Turkey
based on an outlook where the accommodative effect of financial conditions
on domestic demand and credits will taper off in the second half of the year.
Chart 1.1.9.
tightening
easing
Financial Conditions Index
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
-2.5
-2.5
-3.0
-3.0
-3.5
-3.5
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
2006
2007
2008
2009
2010
2011
2012
13
*For further details on financial conditions index, see CBT Research Notes in Economics No.12/31
and Inflation Report 2012-IV, Box 5.2.
Source: CBRT.
1.2. Macroeconomic Developments and Main
Assumptions
Inflation
Inflation posted a higher-than-expected increase in the second quarter
of 2013 and stood at 8.3 percent at the end of the quarter (Chart 1.2.1). The
higher-than-estimated
course
of
inflation
was
mainly
attributed
to
developments in unprocessed food prices, which posed upside risks on inflation
in the April Inflation Report. In fact, inflation excluding unprocessed food and
tobacco was largely in line with forecasts (Chart 1.2.2).
Chart 1.2.1.
Chart 1.2.2.
April 2013 Inflation Forecasts and Realizations
Inflation Forecast and Realizations Excluding
Unprocessed Food, Tobacco and Alcoholic
Beverages
(Percent)
(Percent)
10
10
9
9
9
9
8
8
8
8
7
7
7
7
6
6
6
6
5
5
5
5
4
4
4
4
10
0613
Actual
0313
1212
0912
Forecast Range*
0612
Actual
0313
1212
0912
0612
Forecast Range*
0613
10
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: TurkStat, CBRT.
Inflation Report 2013-III
5
Central Bank of the Republic of Turkey
A higher-than-projected rise in inflation in the previous quarter was partly
induced by the services inflation, which overshot expectations. This unexpected
rise in services inflation added around 0.1 percentage points to the year-end
inflation forecast. On the other hand, as the effects of exchange rate
developments on core goods prices have not yet materialized, prices of core
goods continued with a downward trend, owing also to the base effect
(Chart 1.2.3). In light of these developments, core inflation indicators followed a
flat course in the second quarter (Chart 1.2.4).
Chart 1.2.3.
Chart 1.2.4.
Core Goods and Services Prices
Core Inflation Indicators
(Annual Percent Change)
(Annual Percent Change )
Core Goods
Services
SCA-H
SCA-I
0
2
2
-2
-2
0
0
0908
1208
0309
0609
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
Source: TurkStat.
12
0613
0
1212
4
2
0612
4
2
1211
6
4
0611
6
4
1210
8
6
0610
8
6
1209
8
0609
8
1208
10
0608
10
1207
10
0607
10
1206
12
0606
12
12
Source: TurkStat.
Supply and Demand
National accounts data pertaining to the first quarter of 2013 pointed to a
domestic-demand-driven recovery in economic activity as envisaged in the
April Inflation Report. The second quarter data indicated that demand for
consumption maintains a moderate growth. However, the recent volatility in
financial markets induced by the changes in global liquidity conditions may
cause the domestic demand to follow a weaker course in the second half of
the year than envisaged in the previous reporting period. In fact, firms’
expectations for domestic orders have recently displayed a slight decline.
External demand remained weak in the second quarter of 2013. Euro
Area economic activity remained on a downward track, while global growth
forecasts were pulled down in this period. Accordingly, export-weighted global
growth index was slightly revised downwards (Chart 1.2.5).
6
Inflation Report 2013-III
Central Bank of the Republic of Turkey
Chart 1.2.5.
Export-Weighted Global Economic Activity Index* (2008Q2=100)
110
110
109
April 2013
109
July 2013
1214
0914
0614
0314
1213
101
0913
101
0613
102
0313
103
102
1212
103
0912
104
0612
105
104
0312
105
1211
106
0911
107
106
0611
108
107
0311
108
* For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”.
Source: Bloomberg, Consensus Forecasts, CBRT.
To sum up, forecasts are based on an outlook in which the contribution of
aggregate demand conditions to the fall in inflation has slightly increased
compared to the previous reporting period. As the effects of economic activity
on inflation generally appear with a lag, this revision did not affect end-2013
inflation forecasts; whereas it pulled the end-2014 inflation forecasts down by
0.1 percentage points.
Energy, Import and Food Prices
Import prices remained flat in the last quarter largely consistent with the
assumptions of the April Inflation Report (Chart 1.2.6). On the other hand, TLdenominated import prices rose notably due to the recent developments in
exchange rates. In addition, in line with the average futures prices in the first
three weeks of July, average oil price assumption for 2013, which was set as USD
103 in April, was revised upwards to USD 107 (Chart 1.2.6). These developments
added 0.8 percentage points to end-2013 forecast and 0.2 points to end-2014
inflation forecast.
Inflation Report 2013-III
7
Central Bank of the Republic of Turkey
Chart 1.2.6.
Oil and Import Price Assumptions
Oil Prices (USD/bbl)
July 2013
Import Prices (USD, 2010=100)
April 2013
July 2013
April 2013
130
120
120
120
120
115
115
110
110
110
110
100
100
105
105
90
90
80
80
100
100
70
70
95
95
60
60
90
90
* Shaded region indicates the 70 percent confidence interval for
the forecast.
Source Bloomberg, CBRT.
0909
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
1209
0310
0610
0910
1210
0311
0611
0911
1211
0312
0612
0912
1212
0313
0613
0913
1213
130
* Shaded region indicates the 70 percent confidence interval for the
forecast.
Source: TurkStat, CBRT.
The assumption for the annual rate of increase in food prices remained
unchanged as 7 percent. In other words, the recent unfavorable course of
unprocessed food prices will be temporary, and prices will gradually be
normalized by August.
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that no additional
tax adjustments will be introduced to tobacco and energy products in the rest
of the year. Meanwhile, other tax adjustments and administered prices are
assumed to be consistent with the inflation targets and automatic pricing
mechanisms.
MTP projections on the fiscal policy stance are taken as given.
Accordingly, it is assumed that fiscal discipline will be preserved and the ratio of
primary expenditures to GDP will not display a notable change compared to
the first half of the year. Thus, there has been no change in end-2013 inflation
forecast stemming from the fiscal policy.
1.3. Inflation and Monetary Policy Outlook
Medium-term forecasts envisage an outlook where the cautious and
flexible stance of the monetary policy is preserved on account of the recentlyelevated uncertainties regarding global monetary policies and weakening
capital flows. Accordingly, it is assumed that the liquidity policy will be tight, the
8
Inflation Report 2013-III
Central Bank of the Republic of Turkey
interest rate corridor will
be actively used when necessary, and the annual
growth rate of credit will fall to 15 percent by mid-2014. Accordingly, inflation is
expected to be, with 70 percent probability, between 5.2 percent and 7.2
percent (with a mid-point of 6.2 percent) at end-2013 and between 3.3 percent
and 6.7 percent (with a mid-point of 5.0 percent) at end-2014. 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
0616
0316
1215
0915
0615
0315
1214
0914
0614
0314
1213
0913
0613
0313
1212
0912
0612
-4
* Shaded region indicates the 70 percent confidence interval for the forecast.
Source: CBRT.
In sum, given the assumptions underlying the inflation forecasts and
external conditions, the end-2013 inflation forecast was revised upwards by 0.9
percentage points mainly due to developments in the exchange rate and oil
prices. Given the sluggish outlook of the global economy and the mild course of
domestic demand, these developments are expected to have a limited effect
on end-2014 inflation.
Inflation is estimated to fluctuate in the short term due to the base effect
on energy prices. Accordingly, annual inflation is expected to go up in July
before trending downwards in August. Although inflation is likely to overshoot
the 5 percent target at year-end, it is expected to converge to the target by
early 2014 as the effects of the hike in tobacco prices on annual inflation taper
off in January 2013 (Chart 1.3.1). Core inflation indicators (SCA-H and SCA-I) are
expected to display a limited rise in the third quarter due to the lagged effects
of the recent exchange rate developments, and then remain largely flat until
the end of the year.
Inflation Report 2013-III
9
Central Bank of the Republic of Turkey
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
Ongoing fragility in the global economy and heightened uncertainty
regarding global monetary policies necessitate a flexible monetary policy
framework. Accordingly, global liquidity conditions will play an important role in
the future course of monetary policy. The current monetary policy and the
instruments designed by the CBRT provide a flexible framework to contain
adverse effects of global shocks on the domestic economy.
Currently, the data on global economic activity do not exhibit a stable
pattern. Risk appetite and capital flows may remain volatile, should
uncertainties regarding economic policies of advanced economies persist. This
situation may pose risks to the inflation outlook and financial stability. In order to
contain the excessive volatility in the exchange rate, the CBRT will effectively
use the interest rate corridor and other policy instruments should such a risk
materialize.
The possibility of a delay in the global economic recovery, which will
require maintaining quantitative easing policies in advanced economies for an
extended period, remains as a downside risk. In that case, capital flows to
emerging economies are likely to re-accelerate. Materialization of such a
scenario may prompt the CBRT to lower short-term money market rates by
easing liquidity conditions, while the adverse impact of rapid capital inflows on
financial stability can be alleviated through required reserves and reserve
options mechanism.
Recently, the medium-term inflation expectations have displayed a slight
deterioration as several factors have simultaneously exerted pressure on
inflation. Increases in unprocessed food prices, higher oil prices, and exchange
rate volatility may continue to have an adverse impact on inflation in the short
term. Although these effects are expected to be temporary, it is also possible
that unprocessed food prices can be corrected with a delay or financial
markets may continue to be volatile. Accordingly, the CBRT will maintain its
10
Inflation Report 2013-III
Central Bank of the Republic of Turkey
cautious stance until the inflation outlook is consistent with the medium-term
targets and will opt for further monetary tightening by closely monitoring pricing
behavior.
In
formulating
its
monetary
policy
strategy,
the
CBRT
monitors
developments on fiscal policy and tax adjustments closely with regard to their
effects on the inflation outlook. Forecasts presented in the baseline scenario
take the framework outlined in the MTP as given. Hence, it is assumed that fiscal
discipline will be maintained and there will be no unanticipated hikes to
administered prices in the forthcoming period. A revision of 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.
Sustaining the cautious stance in fiscal and financial sector policies is
critical to maintain our economic resilience against global imbalances.
Strengthening structural reforms that ensure the sustainability of fiscal discipline
on
a
permanent
basis
and
reduce
the
savings
deficit
will
support
macroeconomic stability in the medium term. Steps taken in this regard will also
provide more room for maneuvering the monetary policy and improve social
welfare
by
keeping
interest
rates
of
long-term
government
securities
permanently at low levels. In this respect, fulfilling the structural reforms
envisaged by the MTP remains to be of utmost importance.
Inflation Report 2013-III
11
Central Bank of the Republic of Turkey
12
Inflation Report 2013-III