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Central Bank of the Republic of Turkey 1. Overview Global economic activity continued to be weak in the first quarter of the year. Meanwhile, risk appetite and capital flows displayed a volatile outlook amid persisting uncertainties regarding the global economy (Charts 1 and 2). Problems related to the Euro Area and uncertainties regarding the economic policies of advanced economies stood out as the leading factors behind the increase in the volatility of the risk appetite in this period. While the recent additional monetary easing by the BoJ stimulated the appetite for investment in risky assets, developments in the Southern Cyprus and Italy proved that fragilities in the global economy remained significant. Chart 1. Chart 2. Global Risk Appetite Portfolio Flows to Emerging Economies (4-Week Average, Billion USD) Credit Suisse Risk Appetite Index Equity Funds VIX (inverted, right axis) Bond Funds 30 0 0 -4 35 -2 -2 -6 40 -4 -4 -8 45 -6 -6 1010 0410 Source: Credit Suisse, Bloomberg. 0113 -2 0712 2 0112 2 0711 25 0111 0 0710 4 0110 4 0709 20 0109 2 0708 6 0108 6 0413 15 1012 4 0412 8 1011 8 0411 10 6 Source: EPFR, Bloomberg. Sustained quantitative easing in advanced economies causes global rates to remain at historic lows, and fuels capital flows towards emerging economies. On the other hand, lingering fragilities in the global economy lead to an unstable risk appetite. This outlook for global liquidity and risk appetite bring about large and volatile portfolio flows towards emerging economies (Chart 2). This underlines the importance of maintaining a flexible policy framework with multiple instruments. Inflation Report 2013-II 1 Central Bank of the Republic of Turkey 1.1. Monetary Policy and Monetary Conditions The CBRT has designed and implemented a new policy framework that takes into account macro financial risks since the end of 2010. Policies implemented in this period aimed at managing macro financial risks without prejudice to price stability in the medium term. To this end, additional policy instruments were developed. Under the new strategy, monetary policy put special emphasis on containing the potential excessive volatility in domestic credit and exchange rates caused by capital flows. In this respect, while credit growth and its volatility have been brought down, exchange rate has been aligned closer with economic fundamentals. Owing to these policies, 2012 was marked as a year of re-balancing. The composition of growth displayed a healthier outlook, while the current account continued to improve (Chart 1.1.1). The contribution of net exports to growth has increased markedly (Chart 1.1.2). Chart 1.1.2. Current Account Balance Contribution to Annual GDP Growth (12-Month Cumulative, Billion USD) (Percentage Point) 30 Current Account Balance (excluding energy and gold) Current Account Balance 10 30 10 -10 -10 -30 -30 -50 -50 -70 -70 -90 0208 0508 0808 1108 0209 0509 0809 1109 0210 0510 0810 1110 0211 0511 0811 1111 0212 0512 0812 1112 0213 -90 Source: TurkStat, CBRT. Thousands Chart 1.1.1. Final Domestic Demand Net Exports Change in Inventories GDP 25 20 25 20 15 15 10 10 5 5 0 0 -5 -5 - 10 -10 - 15 -15 - 20 -20 - 25 -25 12341234123412341234123412341234 2005 2006 2007 2008 2009 2010 2011 2012 Source: TurkStat, CBRT. In the second half of 2012, credits decelerated further, domestic demand remained subdued and inflation followed a downward trend. Accordingly, the CBRT adopted a more accommodative monetary policy stance by gradually increasing the liquidity injected to the market. On the other hand, as of late 2012, accelerated capital inflows, revived credit growth and the appreciation pressure on the Turkish lira led the CBRT to re-focus on macro financial risks. The MPC stated that in such an environment, the proper policy would be to keep interest rates low while preserving macro prudential measures. Accordingly, 2 Inflation Report 2013-II Central Bank of the Republic of Turkey short-term interest rates were lowered in the first quarter of the year, while a moderate tightening was sustained through required reserves (Chart 1.1.3). The winding down of risks regarding the Euro Area owing to the support of the ECB as well as the more effective use of the ROM alleviated the need for a wide interest rate corridor as of end-2012. Therefore, the CBRT gradually narrowed the interest rate corridor by lowering the overnight lending rate (Chart 1.1.3). Chart 1.1.3. Policy Rate and Liquidity Policies Interest Rate Corridor CBRT Average Funding Rate BIST O/N Rates (10-day Moving Average) Policy Rate 15 15 0413 0213 0313 1 0113 1 1112 1212 3 0912 1012 3 0812 5 0612 0712 5 0412 0512 7 0212 0312 7 0112 9 1111 1211 9 0911 1011 11 0811 11 0611 0711 13 0511 13 Source: BIST, CBRT. In order to slow down the credit growth rate, which remained well above the reference value of 15 percent, the CBRT normalized its liquidity stance in late February. In fact, overnight market rates have lately started hovering around the policy rate (Chart 1.1.3). Moreover, a moderate tightening was sustained through required reserves so as to contain the excessively expansionary effects of capital inflows on credit growth. Strong capital inflows in this period necessitated further increases in ROC’s, ensuring a more effective use of ROM. In the first quarter of the year, the MPC emphasized ongoing uncertainties regarding the global economy as well as the volatility in capital flows, and maintained its stance that monetary policy should be kept flexible in both directions. In this context, it was re-iterated that the impact of the measures undertaken on credit, domestic demand, and inflation expectations will be Inflation Report 2013-II 3 Central Bank of the Republic of Turkey monitored closely and the funding amount will be adjusted in either direction, as needed. Parallel to the volatility in the risk appetite, market rates also followed a volatile course in the first quarter of the year. Following the publication of the January Inflation Report, uncertainties in the Euro Area shifted the yield curve upwards. More recently, capital inflows re-accelerated owing to the quantitative easing package announced by the BoJ. Furthermore, the CBRT’s policy rate cut in April as well as the favorable risk perceptions regarding Turkey also supported the downward movement of interest rates. Due to these developments, the yield curve shifted downwards for each maturity compared to the previous reporting period (Chart 1.1.4). Real interest rates also displayed a similar movement and continued to hover around historically-low levels (Chart 1.1.5). Chart 1.1.4 Chart 1.1.5. Yield Curve* 2-Year Real Interest Rates for Turkey* (Percent) (Percent) 27 March 26 April 6.5 5 5 6.2 6.2 4 4 3 3 5.9 5.9 2 2 5.6 5.6 1 1 0 0 -1 -1 5.3 5.3 5 5 0.5 1 1.5 2 2.5 3 Maturity (year) 3.5 4 *Calculated from the compounded returns on bonds quoted in BIST Bonds and Bills Market by using ENS method. Source: BIST, CBRT. 0410 0610 0810 1010 1210 0211 0411 0611 0811 1011 1211 0212 0412 0612 0812 1012 1212 0213 0413 Yield (percent) 29 January 6.5 * Calculated as the 2-year discounted bond returns derived from the yield curve, minus the 24-month ahead inflation expectations from the CBRT’s Survey of Expectations. Source: BIST, CBRT. On account of easing external financing conditions and the CBRT’s monetary policy decisions, credit rates remained on a downward track in recent months. Consumer loan rates declined further in line with the fall in longterm market rates, while commercial loan rates declined more markedly with the lowering of the upper bound of the interest rate corridor (Chart 1.1.6). Moreover, deposit rates and the bill and bond rates issued by banks also trended downwards in the first quarter of the year, following the fall in the CBRT’s average funding rate (Chart 1.1.7). 4 Inflation Report 2013-II Central Bank of the Republic of Turkey Chart 1.1.6. Chart 1.1.7. TL Loan Rates Primary Market Rates on Domestic Issues of Bills and Bonds by Banks (Percent) (Percent) Automobile Personal Bills and Bonds Rate Deposit Rate CBRT Average Funding Rate 21 12 19 19 11 11 17 17 10 10 15 15 9 9 13 13 8 8 11 11 7 7 9 9 6 6 7 5 5 5 4 4 7 0313 0113 1112 0912 0712 0512 0312 0112 1111 0911 0711 0511 0311 0111 1110 5 Source: CBRT. 12 0811 0911 1011 1111 1211 0112 0212 0312 0412 0512 0612 0712 0812 0912 1012 1112 1212 0113 0213 0313 21 Housing Commercial Source: PDP, CBRT. Credits have re-accelerated as of late 2012. Total credit growth has recently converged to past years’ average (Chart 1.1.8). Against this background, annual credit growth rates have been hovering above the reference value (Chart 1.1.9). Chart 1.1.8. Chart 1.1.9. Growth Rate of Real Sector Loans Annual Growth Rate of Loans (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent) (Percent) Commercial Loans 2007-2012 Average 2013 2012 15 15 0 0 10 10 Source: CBRT. Dec 0313 5 0113 5 1112 20 0912 20 0712 10 0512 10 0312 25 0112 25 1111 15 0911 15 0711 30 0511 30 0311 20 0111 20 1110 35 Nov 35 Oct 25 Sep 25 Aug 40 Jul 40 Jun 30 May 30 Apr 45 Mar 45 Feb 35 Jan 35 Total Loans Consumer Loans Source: CBRT. In sum, strong capital flows and falling interest rates led the FCI to improve in the first quarter of the year (Chart 1.1.10). Inflation Report 2013-II 5 Central Bank of the Republic of Turkey Chart 1.1.10. 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 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 overshot the forecasts in the first quarter of 2013, and climbed to 7.3 percent (Chart 1.2.1). The higher-than-envisaged increase in inflation was mainly driven by unprocessed food prices, which were mentioned in the January Inflation Report as an upside risk. Meanwhile, core inflation indicators also remained slightly above expectations. Chart 1.2.1. January 2013 Inflation Forecasts and Realizations (Percent) Forecast Range* Actual 12 Percent 10 8 6 0313 1212 0912 0612 0312 4 * Shaded region indicates the 70 percent confidence interval for the forecast. Source: TurkStat, CBRT. The contribution of exchange rate developments to disinflation declined in this period. This, coupled with a partial recovery in domestic demand, slowed 6 Inflation Report 2013-II Central Bank of the Republic of Turkey down the decline in the inflation rate of core goods prices. On the other hand, the underlying trend of services prices slightly picked-up (Chart 1.2.2). Accordingly, core inflation indicators remained flat in the first quarter (Chart 1.2.3). As core inflation indicators stood above expectations, the initial point of inflation forecasts was slightly revised upwards. This revision added around 0.2 percentage points to the year-end inflation forecast. Chart 1.2.2. Chart 1.2.3. Core Goods and Services Prices Core Inflation Indicators SCA-H and SCA-I (Annual Percent Change) (Annual Percent Change) SCA-H Source: TurkStat. 0 0 0313 2 0912 2 0312 4 0911 4 0311 6 0910 6 0310 8 0909 8 0309 10 0908 10 0308 12 0907 -2 0113 -2 0912 0 0512 0 0112 2 0911 4 2 0511 4 0111 6 0910 6 0510 8 0110 8 0909 10 0509 10 0109 12 0908 12 SCA-I 12 0307 14 0906 Services 0306 Core Goods 14 Source: TurkStat. Supply and Demand National income data regarding the last quarter of 2012 point to a decline in domestic demand due to private investment demand. Demand conditions in this period followed a slightly weaker course compared to the projections of the January Inflation Report. Meanwhile, the first quarter data indicated a mild pick-up in the consumption demand and a notable rebound in investment. Recently, sustained support of financial conditions, improvement in confidence indices and the upward trend in credits signal that the recovery will continue in the second quarter. Thus, forecasts were based on an outlook entailing a slightly weaker aggregate demand in 2012 compared to the previous reporting period, while keeping projections for 2013 broadly unchanged. External demand remained subdued in the first quarter of 2013. Despite the slowdown in the Euro Area economic activity, global growth as well as export-weighted global growth index remained almost unchanged (Chart 1.2.4). Inflation Report 2013-II 7 Central Bank of the Republic of Turkey Chart 1.2.4. Export-Weighted Global Economic Activity Index* (2008Q2=100) April 2013 January 2013 1113 0913 0713 0513 0313 0113 101 1112 101 0912 102 0712 102 0512 103 0312 103 0112 104 1111 104 0911 105 0711 105 0511 106 0311 106 * For methodology, see Inflation Report 2010-II, Box 2.1 “Foreign Demand Index for Turkey”. Source: Bloomberg, Consensus Forecasts, CBRT. In sum, domestic and external demand developments do not suggest any notable change in the impact of demand conditions on inflation forecasts compared to the previous reporting period. Energy, Import and Food Prices Import prices remained below the projections of the January Inflation Report (Chart 1.2.5). In particular, commodity prices have recently displayed a higher-than-envisaged decline. In this respect, the assumption for the average oil price in 2013, which was USD 108 in the January Inflation Report, was revised downwards to USD 103 in line with the average of the futures prices in the first three weeks of April (Chart 1.2.5). The effect of this revision on the inflation forecast for end-2013 was around 0.2 percentage points on the downside. On the other hand, the projection for the annual rate of increase of food prices was kept unchanged at 7 percent as in the previous reporting period. Chart 1.2.5. Oil and Import Price Assumptions Oil Prices (USD/bbl) January 2013 Import Prices (USD, 2010=100) April 2013 130 120 120 110 110 100 April 2013 115 115 100 110 110 90 90 105 105 80 80 100 100 70 70 60 60 95 95 90 90 0909 1209 0310 0610 0910 1210 0311 0611 0911 1211 0312 0612 0912 1212 0313 0613 0913 1213 120 0909 1209 0310 0610 0910 1210 0311 0611 0911 1211 0312 0612 0912 1212 0313 0613 0913 1213 120 Source Bloomberg, CBRT. 8 January 2013 130 Source: TurkStat, CBRT. Inflation Report 2013-II Central Bank of the Republic of Turkey 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. On the other hand, other tax adjustments and administered prices are assumed to be consistent with inflation targets and automatic pricing mechanisms. Regarding the fiscal policy stance, medium-term inflation forecasts take MTP projections as given. Accordingly, it is assumed that fiscal discipline will be preserved and the structural budget balance will not display a notable change in the forthcoming period. 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 macro financial risks arising from the recent surge in capital inflows are contained. In other words, the policy stance behind the forecast is one in which interest rates are kept low, while macro prudential measures are sustained. In this respect, it is assumed that annual loan growth rate will hover around 15 percent. Accordingly, inflation is expected to be, with 70 percent probability, between 4.1 percent and 6.5 percent (with a mid-point of 5.3 percent) at end-2013; and between 3.1 percent and 6.7 percent (with a mid-point of 4.9 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 0316 1215 0915 0615 0315 1214 0914 0614 0314 1213 0913 0613 0313 1212 0912 0612 0312 -4 * Shaded region indicates the 70 percent confidence interval for the forecast. Source: CBRT. Inflation Report 2013-II 9 Central Bank of the Republic of Turkey In sum, given the assumptions underlying the inflation forecasts and external conditions, the upward revision of inflation at the initial point has been compensated by the downward revision in commodity prices. Accordingly, inflation forecast for end-2013 was kept unchanged in the inter-reportimng period and year-end inflation forecast was kept at 5.3 percent. Inflation is expected to fluctuate in the short term due to the base effect in energy prices. Accordingly, annual inflation is estimated to decrease significantly in April, and increase gradually in the May-July period. The downward trend in inflation is expected to resume after July, bringing inflation down to 5.3 percent at the year-end (Chart 1.3.1). Meanwhile, core inflation indicators are projected to remain on a mild track. Although the year-end forecast was kept unchanged, inflation path was revised upwards in the short term mainly because of the recently soaring unprocessed food prices. Inflation is projected to converge to the path presented in the January Inflation Report by the year-end (Chart 1.3.2). Comparison of January 2013 and April 2013 Inflation Report Forecasts Chart 1.3.2. Chart 1.3.3. Inflation Forecasts Output Gap Forecasts 8 8 1 1 January 2013 Actual 0.5 7 0.5 7 0 April 2013 6 6 5 5 January 2013 0 -0.5 -0.5 -1 -1 -1.5 Source: TurkStat, CBRT. -2 April 2013 1215 0915 0615 0315 1213 0913 0613 -2.5 0313 -2.5 1212 1215 0915 0615 0315 1214 0914 0614 0314 1213 0913 0613 0313 1212 -2 1214 3 0914 3 -1.5 0614 4 0314 4 Source: CBRT. Chart 1.3.3 presents the revision in output gap forecasts. Due to weakerthan-expected economic activity in the last quarter of 2012, the initial point of the output gap forecasts was slightly revised downwards compared to the previous Report. Nevertheless, in line with the expected recovery in domestic demand, it was assumed that output gap would stay close to the path envisaged in January over the course of the year. 10 Inflation Report 2013-II Central Bank of the Republic of Turkey It should be underlined once again that inflation forecasts and the policy stance are formulated in consideration of macro financial risks. Forecasts are based on an approach which not only aims at bringing inflation close to the target of 5 percent, but also warrants stable economic growth. In the forthcoming period, bringing inflation close to the target without a deterioration in external balance requires that credit should be growing at a reasonable rate, while domestic currency should not be appreciating excessively. Therefore, it is assessed that accommodating the global low interest rate environment while continuing with a stance to increase reserves is the optimal policy mix. Chart 1.3.4. Change in Credit /GDP and Current Chart 1.3.5. CPI-Based Reel Effective Exchange Account Balance/GDP Rate (2003=100) Current Account Balance / GDP Change in Credit / GDP (right axis) 12 CPI-Based Real Effective Exchange Rate (2003=100) 14 10 1.5% trend 140 140 130 130 120 120 110 110 4 100 100 2 90 90 80 80 12 8 2% trend 16 10 8 6 4 2 Source: TurkStat, CBRT. 1112 0612 0112 0811 0311 1010 0510 1209 0709 0209 0908 0408 1107 0607 0 0107 0 0303 0903 0304 0904 0305 0905 0306 0906 0307 0907 0308 0908 0309 0909 0310 0910 0311 0911 0312 0912 0313 6 Source: CBRT. 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 Developments in the first quarter of the year highlight the ongoing fragility in the global economy. During this period, data regarding global economy did not diplay a stable outlook, whereas economic policy uncertainty in advanced economies has continued. The policy framework designed by the CBRT and the instruments developed in this respect provide a flexible framework to contain the adverse impact of the global shocks on the domestic economy. Inflation Report 2013-II 11 Central Bank of the Republic of Turkey Capital inflows have re-accelerated in the recent period. Improved perceptions regarding Turkish economy and the monetary expansion package announced by the Bank of Japan suggest that portfolio flows may continue to exhibit a strong pattern in the forthcoming period. The possibility of further inflows of capital as well as weak global demand has the potential to increase macro financial risks through a deterioration in external balance. Should this scenario materialize, the CBRT will continue to keep short term interest rates at low levels, while tightening through reserve requirements and ROM. On the other hand, the ongoing uncertainty regarding Euro Area suggests that risk appetite may continue to be volatile. Given the quantitative easing packages implemented by advanced economies, the impact of the fluctuations in the risk appetite on capital flows may even increase in the forthcoming period. Although the ROM plays a stabilizing role against possible shocks, ongoing uncertainties regarding the global economy and the volatility in capital flows necessitate the monetary policy to remain flexible in both directions. Therefore, the impact of the recent measures undertaken on credit, domestic demand, and inflation expectations will be monitored closely, and the funding amount will be adjusted in either direction as needed. On the other hand, monetary policy may normalize in advanced economies, should the measures taken towards the solution of problems regarding the global economy be completed sooner and more decisively than envisaged. Materialization of such a risk may require a tightening using all policy instruments, since it would lead to a faster than expected rise in aggregate demand and import prices. The baseline forecasts in the Report suggest that keeping inflation close to the target without a deterioration in the external balance would require a mild increase in the domestic demand along with a reasonable growth rate of credit. However, it is likely that the domestic demand and credit may display a stronger course than envisaged. Recently, the gradual easing in financial conditions indicates upside risks regarding credit growth. The CBRT will closely monitor the developments in the domestic demand and credit, and take the necessary measures to prevent a deterioration in the pricing behavior using the instruments at its disposal. 12 Inflation Report 2013-II Central Bank of the Republic of Turkey The assumption regarding food prices was kept unchanged in the baseline scenario. However, the volatile course of unprocessed continues to pose risks regarding inflation outlook. The CBRT will not respond to volatility in unprocessed food prices, yet will deliver the necessary tightening should this lead to a persistent increase and a deterioration in the pricing behavior. On the other hand, the recent slowdown in global demand and developments regarding commodity prices offset the upside risks arising from food prices. The CBRT monitors fiscal policy developments 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. In this respect, it is assumed that fiscal discipline will be sustained and there will be no unanticipated hikes to administered prices. 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. Prudent fiscal and financial sector policies are crucial for preserving the resilience of our economy against existing global imbalances. Strengthening the structural reform agenda that would ensure the sustainability of the fiscal discipline and reduce the savings deficit would support macroeconomic stability in the medium term. This will also provide more flexibility for monetary policy and improve social welfare by keeping interest rates of long-term government securities persistently at low levels. In this respect, implementation of the structural reforms envisaged by the MTP remains to be of utmost importance. Inflation Report 2013-II 13 Central Bank of the Republic of Turkey Box 1.1 Credit Impulse and the Business Cycle Credits gained importance in Turkey as a policy variable by the adoption of a policy approach that observes financial stability from a macro perspective at end-2010. Accordingly, credit growth has gradually been aligned with financial stability in the recent years owing to the implemented macroprudential and monetary policies. Although the observed slowdown in domestic demand is considered to a favored and healthy correction, the below-potential growth of the GDP in 2012 resulted in a highlighted relationship between credit policies and economic growth. Based on Kara and Tiryaki (2013), this Box introduces and calculates “credit impulse” in order to contribute to the evaluation of the relationship between credits and economic activity. Credit Impulse The initial recovery in final domestic demand without an increase in the credit stock is called “non-credit recovery” in the economic literature, and this is especially observed during recovery periods following financial crises. Biggs, Mayer and Pick (2009) provide a theoretical explanation to this observation through a simple model, and demonstrate that rather than credit stock, new credit utilization may occasionally be more influential on the relationship between credits and economic growth. The authors express the relationship between aggregate demand growth and credits as follows: ( In ) this equation, ( denotes GDP, ) ( ) denotes credit stock, change in credit stock (net credit utilization), capital stock, and denotes the denotes the depreciation of the denotes the interest rate. The first term on the right-hand side of the equation shows the ratio of the change in credit utilization to the national income. As this term is defined as the change of the change in credits, i.e. the second-order derivative, it will be called “credit impulse”. The second term in the equation gives the credit growth rate weighted by the ratio of credits to the national income. As also underlined in Kara, Küçük, Tiryaki and Yüksel (2013), this variable, which is directly related to financial stability, corresponds to “net credit utilization/GDP” (ΔD/Y), and it is expected to follow a stable course for indebtedness ratios to be robust. 14 Inflation Report 2013-II Central Bank of the Republic of Turkey The above equation and these empirical findings are compatible with the general economic intuitions. Being a flow variable, aggregate spending are supposed to be more closely related to flow data like net credit utilization, as opposed to stock data on credits.1 Therefore, the rate of change in aggregate spending (GDP growth) should be more closely related to the change in net credit utilization (credit impulse). The Relationship Between Credit Impulse and Economic Growth In order to examine the relationship between credits and GDP growth in Turkey, firstly, credit impulse and net credit utilization/GDP variables are constructed based on the above equation. Considering the difficulties in the seasonal adjustment of the GDP and credit series, the above equation was adjusted to show quarterly year-on-year changes. For example, credit impulse for 2011Q4 is defined as: ( ) ( ) ( ) while net credit utilization is constructed as following: ( ) ( ) In equations 2 and 3, credit stock ( ) is expressed by banking sector’s total credit extended to the non-financial sector at the end of each period (nominal and unadjusted for the exchange rate effect); while the quarterly nominal GDP data is used to denote ( ) series. Chart 1 shows GDP growth along with the credit impulse and net credit utilization estimated using equations 2 and 3. The presence of frequent changes in credit impulse in the sampling period produces a strong relationship between credit impulse and economic growth. The sharp decline in credit growth due to unrest caused by the global crisis in the 2008-2009 period spilled over into credit impulse and also to the GDP growth. In the succeeding period, owing to accelerated capital inflows led by the monetary easing policies implemented at a global scale, the credit volume posted an increase beyond normalization; and credit impulse peaked in the last quarter of 2010. As of that date, macroprudential policies implemented by the CBRT in coordination with other authorities brought about a notable fall in credit growth. Even though the fall in credit growth was not Due to absence of flow data in total credits, this study employs changes in stock data. Mutluer-Kurul (2012) displays that flow data on consumer loans are closely related to consumption demand and the comparison of flow data with the changes in stock data shows that two series follow quite similar path. 1 Inflation Report 2013-II 15 Central Bank of the Republic of Turkey proportionately reflected to GDP growth due to higher contribution of net exports, the contribution of credit impulse to GDP growth still saw a sharp decline in 2011 and 2012. To exemplify, credit impulse in 2012Q3 stood close to levels registered in 2009, following the global crisis. Chart 1. Real GDP Growth, Credit Impulse and Net Credit Utilization (Percent) Real GDP Growth (year-on-year) Net Credit Utilization (right axis) Real GDP Growth (year-on-year) Credit impulse (right axis) 10 3 -8 1 2012Q3 2012Q1 2011Q3 2011Q1 2010Q3 2010Q1 2009Q3 2009Q1 2008Q3 -10 2008Q1 -8 2012Q3 5 -6 -6 2012Q1 7 -4 -5 -4 2011Q3 9 -2 -2 2011Q1 11 0 0 0 2010Q3 13 2 2 2010Q1 15 4 5 4 2009Q3 6 2009Q1 17 6 2008Q3 19 8 10 2008Q1 10 8 Source: CBRT. The CBRT stated that a 15-percent growth rate for credits in the medium term would be reasonable and healthy.2 However, there is a frequent public debate on whether this rate is compatible with the economic recovery expected in 2013. This is mainly because the relationship between credits and the GDP growth is considered only from the credit growth rate perspective. However, as also illustrated above, evaluating the contribution of credits to growth by only focusing on credit growth rate may be misleading in certain periods. Credit impulse (change in net credit utilization) may have great informative value regarding economic growth, especially after periods of major changes in credit growth rate (like the 2011-2012 period). In order to see the potential support that credit impulse can provide to economic growth in 2013, 15 percent was taken as the reference growth rate for credits, and credit impulse besides annual net credit utilization consistent with this ratio were depicted in Chart 2.3 As for the GDP growth in 2013, MTP projection was used. the net credit utilization series on the right-hand side panel points to a relatively flat course in 2013 when compared to the previous year. Thus, this indicator may lead to a misperception that a 15-percent rate of credit growth may cause domestic demand to remain weak in2013. Such a conclusion(as 2 3 See CBRT (2012). As MTP projections are annual, charts are on annual basis. 16 Inflation Report 2013-II Central Bank of the Republic of Turkey illustrated on the left-hand side panel) will be incomplete without considering the year-on-year surge in credit impulse in 2013. In other words, even assuming that credit growth remains broadly unchanged from the previous year, the increase in the change in net credit utilization (credit impulse) will enhance support provided by credits to growth in 2013. This simple example clearly points the importance of also taking credit impulse variable into account for the evaluation of the consistency between credit projections and economic growth forecasts. Chart 2. Real GDP Growth, Credit Impulse and Net Credit Utilization Projections for 2013 (Percent) Real GDP Growth (year-on-year) Credit Impulse (right axis) 10 Real GDP Growth (year-on-year) 12 Net Credit Utilization (right axis) 10 10 8 16 8 14 8 4 4 4 2 2 2 0 0 2 2013 4 -6 2012 2013 2012 2011 2010 2009 2008 2007 2006 -8 2005 -6 -4 2011 -6 2010 -4 6 -2 2009 -4 8 0 2008 -2 10 2007 -2 12 2006 6 6 2005 6 Source: CBRT. In sum, these findings point that credit growth rate of 15 percent, which is taken as reference in the medium term, corresponds to a notable increase in credit impulse for 2013, and therefore, is consistent with an accelerated aggregate demand growth. Accordingly, credit growth rates taken as reference by the CBRT are thought to be largely commensurate with the growth projections presented in the MTP. REFERENCES Biggs, M., T. Mayer and A. Pick, 2009, Credit and Economic Recovery, De Nederlandsche Bank Working Paper No. 218/2009. Kara, H., H. Küçük, S.T. Tiryaki and C. Yüksel, 2013, In Search of a Reasonable Credit Growth Rate for Turkey, The CBT Research Notes in Economics No. 13/03. Kara, H. and S.T. Tiryaki, 2013, Credit Impulse and the Business Cycle, The CBT Research Notes in Economics No. 13/10. Mutluer-Kurul, D., 2012, Flow Data on Consumer Loans, The CBT Research Notes in Economics No. 12/35. CBRT, 2012, Monetary and Exchange Rate Policy for 2013. Inflation Report 2013-II 17 Central Bank of the Republic of Turkey 18 Inflation Report 2013-II