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Central Bank of the Republic of Turkey
1. Overview
The first quarter of 2015 was marked by the ongoing turbulence in global financial markets,
which was attributed to the continued divergence among global monetary policies, the uncertainties
over the normalization process and the feeble economic activity. In this context, portfolio flows to
emerging economies remained weak and the volatility of exchange rates increased (Chart 1.1).
Similarly, emerging market risk premiums exhibited a fluctuating pattern (Chart 1.2). In this period,
global economic activity likewise remained weak. Growth rates in emerging economies started to slow
down following the fast recovery after the global financial crisis, recording the lowest levels in the postcrisis period as of 2014. Looking at advanced economies, the US economy continues to perform
relatively strong, while growth in the EU is still weak despite the limited recovery in economic activity in
the last quarter of 2014. Leading indicators regarding the first quarter of 2015 signal a limited
improvement in global economic activity. Meanwhile, the EU economy, which is crucial for the external
demand for Turkish exports, has shown signs of recovery.
Volatility across global markets had implications for the Turkish economy as well, causing
fluctuations in risk premium indicators and exchange rates. This period of heightened global
uncertainty poses several opportunities and challenges for the Turkish economy. Falling commodity
prices help to improve inflation and the external balance by affecting input costs positively.
Additionally, the increase in disposable income driven by declining energy prices is likely to support
growth. Low levels of long-term interest rates are also contributing positively to the economy. In an
environment of low global interest rates, extending the maturities of external debt and supporting
prudential borrowing will strengthen financial stability. However, the weak global economy weighs on
growth by restraining exports. Moreover, the high volatility in the EUR/USD parity caused by the
divergence among monetary policies may have an adverse effect on the export outlook owing to
Turkey’s external demand composition.
Chart 1.1.
Chart 1.2.
Portfolio Flows to Emerging Economies
(4-Week Moving Average, Billion USD) and JPMVXYEM
Volatility Index (Percent)
CDS for Emerging Economies and Turkey
(Basis Points)
Equity Funds
Turkey
Emerging Economies*
Selected Emerging Economies**
Bond Funds
13
300
6
12
275
275
4
11
250
250
225
225
8
200
200
7
175
175
150
150
125
125
100
100
8
JPMVXYEM (right axis)
300
10
2
9
0
-2
-4
6
-6
Source: EPFR, Bloomberg.
Inflation Report 2015-II
0315
0115
1114
0914
0714
0514
0314
0114
1113
0913
0713
0415
0115
1014
0714
0414
0114
1013
0713
0413
0113
1012
0712
3
0412
-10
0513
4
0313
-8
0113
5
* Emerging economies include Brazil, Czech Republic, Indonesia, South
Africa, Colombia, Hungary, Mexico, Poland, Romania and Chile. ** Selected
emerging economies include Brazil, Indonesia and South Africa.
Source: Bloomberg.
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Central Bank of the Republic of Turkey
Annual growth saw some deceleration in 2014. On the production side, the supply-related
contraction in the agricultural value added was a factor in this slowdown. On the expenditures side,
net exports were the main contributor to growth. Thus, the current account balance improved
substantially in 2014. Data released for the first quarter of 2015 point to a loss of pace in economic
activity driven by both domestic and external demand. Following the sluggish first quarter, economic
activity is expected to display a moderate and gradual recovery.
The positive effects of the cautious monetary policy stance and the macroprudential measures
helped core inflation indicators improve in the first quarter of the year. High food inflation, however,
was the key factor delaying the decline in consumer inflation. The inflation outlook has somewhat
deteriorated due to cost pressures, yet disinflation is expected to resume due to the cautious monetary
policy stance and a possible correction in food prices.
1.1. Monetary Policy and Financial Conditions
In the first quarter of 2015, the CBRT implemented measured policy rate cuts and maintained its
cautious monetary policy stance by employing a tight liquidity policy (Chart 1.1.1). In view of the
improved core inflation indicators, the CBRT lowered the 1-week repo auction rate from 8.25 percent to
7.75 percent in January and 7.5 percent in February. Moreover, overnight borrowing and lending rates
were lowered by 50 basis points each in February. Rate cuts were kept modest in January and
February due to ongoing global uncertainty, volatility in energy prices, rising domestic food prices and
relatively high levels of inflation expectations. The CBRT average funding rate has been slightly above
7.5 percent due to the recent liquidity policy.
Chart 1.1.1.
Chart 1.1.2.
CBRT Rates and BIST O/N Repo Rates
CBRT Funding
(Percent)
(2-Week Moving Average, Billion TL)
Interest Rate Corridor
15
15
60
Marginal Funding
O/N Funding
1-Week Repo
1-Month Repo
Reverse Repo at the BIST and Interbank Money Market
Net OMO
60
13
13
50
50
11
11
40
40
9
9
30
30
7
7
20
20
5
5
10
10
3
3
0
0
CBRT Average Funding Rate ( 5-day Moving Average)
BIST O/N Repo Rates (5-day Moving Average)
1-Week Repo Rate
0315
0115
1114
0914
0714
0514
0314
0114
1113
0913
0713
0513
0313
-10
0113
0415
0115
1014
0714
0414
0114
1013
0713
0413
0113
1012
0712
0412
0112
1011
1
0711
1
-10
Source: BIST, CBRT.
The CBRT stated that uncertainty in global markets and elevated food prices necessitated
implementing a cautious monetary policy stance. Thus, it was emphasized that inflation expectations,
pricing behavior and other factors that affect inflation would be monitored closely and the cautious
monetary policy stance would be maintained until there is a significant improvement in the inflation
outlook. Owing to the tight liquidity policy stance, the spread between 5-year market rates and the
overnight repo rates at the BIST Interbank Money Market continued to take negative values
(Chart 1.1.3). Along with these developments, the yield curve has remained nearly flat (Chart 1.1.4).
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Inflation Report 2015-II
Central Bank of the Republic of Turkey
Chart 1.1.3.
Chart 1.1.4.
Market Rates and the CBRT Funding Rate
Yield Curve
(Percent)
(Percent)
28 January - 27 April
1-27 April
9.0
4
4
8.5
8.5
2
2
8.0
8.0
0
0
7.5
7.5
-2
-2
7.0
7.0
-4
-4
Source: BIST, Bloomberg, CBRT.
9.00
9.0
10.00
6
8.00
6
7.00
8
5.00
9.5
8
4.00
9.5
3.00
10.0
10
2.00
10.0
10
1.00
10.5
0.50
10.5
12
0.25
14
12
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0914
1114
0115
0315
14
5-Year Market Rates - BIST O/N Rates
5-Year Market Rates
BIST O/N Rates (5-day moving average)
CBRT Average Funding Rate
Maturity (Year)
Source: Bloomberg.
The CBRT has taken several measures regarding foreign exchange liquidity due to the recently
heightened volatility in exchange rates. Starting from 27 February 2015, the amount of foreign
exchange selling auctions has been set more flexibly. On 10 April 2015, it was announced that on days
when deemed necessary the FX selling auction amount might be increased by up to 30 million USD
above the pre-announced minimum amount. Additionally, on 10 March 2015, in order to meet the
temporary foreign exchange liquidity needs of the banking sector and to reduce the TL-denominated
intermediation costs, some technical adjustments were made to different tranches of the reserve
option coefficients. Again, to this end, the remuneration rate for the required reserves maintained in
Turkish lira was raised by 50 basis points at the MPC meeting in April, effective as of 8 May 2015.
Moreover, in order to lessen macrofinancial risks and to support prudential borrowing, the
required reserve ratios applied to non-core FX short-term liabilities of banks and financing companies
were raised to encourage banks to extend the maturity of their external borrowing. In addition, in view
of the global interest rate developments, the rates applied to banks’ 1-week FX borrowings from the
CBRT were reduced on 9 March and 22 April 2015. Accordingly, the 1-week FX deposit interest rate,
which was 7.5 percent and 6.5 percent before early March, was lowered to 4 percent and 2 percent
for US dollar and euro, respectively, as of 24 April 2015.
Thanks to the tight monetary policy stance and the macroprudential measures, the loans
provided to the non-financial sector continued on a moderate course in the first quarter of 2015.
Adjusted for exchange rate changes, loans provided to the non-financial sector increased by 17.6
percent year-on-year and by 16 percent in annualized 13-week moving average terms that cover the
first quarter of 2015. Although annual loan growth may increase slightly in the short term due to the
weak base from the past year, no acceleration is expected for the underlying trend and loans will keep
growing at a reasonable pace given the modest course of financial conditions. A comparison of
consumer and commercial loans shows that commercial loans continue to grow more rapidly than
consumer loans. The annualized growth rate of commercial loans moved closer to the 2007-2014
average towards the end of the first quarter of 2015, whereas the annualized growth rate of consumer
loans remained below the 2007-2014 average (Charts 1.1.5 and 1.1.6). The macroprudential policies in
recent years have helped to bring the credit expansion rate to sustainable levels and to direct the loan
Inflation Report 2015-II
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Central Bank of the Republic of Turkey
composition towards encouraging production rather than consumption. In this sense, the faster growth
rate of commercial loans contributes to both the re-balancing process and to financial stability.
25
20
20
20
20
15
15
15
15
10
10
10
10
5
5
5
5
0
0
0
0
40
35
Dec
Jan
Dec
Nov
Oct
Sep
Aug
Jul
Jun
Apr
May
Mar
Feb
Jan
Oct
25
Nov
25
Sep
30
25
Aug
30
40
Jul
30
35
Jun
30
2007-2014 Average
2014
2015
40
Apr
35
(Adjusted for Exchange Rate, 13-Week Moving Average,
Annualized, Percent)
2007-2014 Average
2014
40
2015
35
May
Commercial Loan Growth
(13-Week Moving Average, Annualized, Percent)
Mar
Chart 1.1.6.
Consumer Loan Growth
Feb
Chart 1.1.5.
Source: CBRT.
1.2. Macroeconomic Developments and Main Assumptions
Inflation
In the first quarter of 2015, annual consumer inflation declined by about 0.6 points from end-2014
to 7.61 percent, overshooting the forecasts of the January Inflation Report (Charts 1.2.1 and 1.2.2). In
this period, core inflation saw a major improvement but the elevated food inflation curbed the fall in
annual inflation. Food prices continued to follow an unfavorable course in the first quarter and
remained the highest contributor to annual inflation with 3.47 points. After pulling inflation down
notably in the fourth quarter of 2014, oil prices started to rise in February, and consequently the positive
impact of the energy prices on inflation has been restrained.
Chart 1.2.1.
Chart 1.2.2.
January Inflation Forecasts and Realizations
January Inflation Forecasts and Realizations Excluding
Unprocessed Food and Tobacco (Percent)
(Percent)
January 2015 Forecasts
January 2015 Forecasts
Actual Inflation
Actual Inflation
7
7
7
7
5
5
5
5
3
3
3
3
0315
9
1214
9
0914
9
0614
9
0315
11
1214
11
0914
11
0614
11
* Shaded region denotes the 70 percent confidence interval for the forecast.
Source: TurkStat, CBRT.
The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies
are having a favorable impact on inflation, especially inflation excluding energy and food (core
inflation indicators). Accordingly, in the first quarter, the underlying trend of core inflation indicators
registered a significant quarter-on-quarter improvement (Chart 1.2.3). Due to developments in food
and oil prices and TL-denominated import prices in the first quarter, inflationary cost pressures gained
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Inflation Report 2015-II
Central Bank of the Republic of Turkey
some strength compared to the previous period. Yet, the cautious monetary policy stance and the
moderate course of domestic demand have helped to restrain these pressures. High food prices
continued to pass through to prices of catering services, bringing the annual food and catering
services inflation that accounts for about 30 percent of the consumption basket up to 14 percent as of
March. In this period, consumer inflation excluding food and catering services declined further to 4.82
percent (Chart 1.2.4).
Chart 1.2.3.
Chart 1.2.4.
Core Inflation Indicators SCA-H and SCA-I
Food and Non-Food Prices
(Seasonally Adjusted, 3-Month Moving Average, Annualized)
(Annual Percent Change)
Food and Catering Services
4
4
2
2
0315
6
0115
8
6
1114
0315
0115
1114
0914
0714
0514
0314
0114
1113
0913
0713
3
0513
3
0313
5
0113
5
8
0914
7
10
0714
7
12
10
0514
9
14
12
0314
9
14
0114
11
1113
11
16
0913
13
18
CPI (excl. food and catering services)
16
0713
13
18
0513
15
0313
SCA-I
0113
SCA-H
15
Source: TuırkStat, CBRT.
To sum up, despite the notable improvement in core inflation indicators during the first quarter,
rising food prices put a restraint on disinflation. In this period, oil prices and TL-denominated import
prices led to cost pressures on inflation. With accommodative weather conditions and possible policy
measures, food inflation may have ample room to decline. The measures that the Food Committee
might suggest (the Food and Agricultural Products Markets Monitoring and Evaluation Committee,
founded in December 2014) are expected to drive food inflation down. Thus, with an ongoing cautious
monetary policy stance and with an outlook of food inflation receding to the average of previous
years, consumer inflation is likely to slow further in the second half of the year. Yet, food prices continue
to constitute an upward risk on the inflation outlook.
Supply and Demand
According to the GDP data for the last quarter of 2014, economic activity was largely consistent
with the outlook presented in the January Inflation Report. In the last quarter, the GDP rose by 2.6
percent and 0.7 percent on an annual and quarterly basis, respectively. Real GDP growth stood at 2.9
percent in 2014 (Chart 1.2.5). An analysis of national income components on the production side
indicates that the contraction in agricultural value added led by adverse weather conditions lowered
the growth rate of 2014. Data on the expenditures side reveal that in the last quarter, final domestic
demand rose owing to the increase in private consumption demand as it did in the previous quarter
(Chart 1.2.6). Across the year, net exports stood out as the leading contributor to growth among the
expenditure items.
Inflation Report 2015-II
5
Central Bank of the Republic of Turkey
Chart 1.2.5.
Chart 1.2.6.
GDP and Final Domestic Demand
Contribution of Demand Components to Year-on-Year
GDP Growth (Percentage Points)
(Seasonally Adjusted, Billion TL, 1998 Prices)
Net Exports
Change in Inventories
Final Domestic Demand
GDP
GDP
34
34
32
32
30
20
Millions
Final Domestic Demand
20
15
15
30
10
10
28
28
5
5
26
26
0
0
24
24
-5
-5
22
-10
22
-10
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
12341234123412341234123412341234
2010
2007 2008 2009 2010 2011 2012 2013 2014
2011
2012
2013
2014
Source: TurkStat.
Data regarding the first quarter of 2015 suggest a weak outlook in economic activity. Industrial
production remained unchanged in the January-February period compared to the last quarter of 2014.
Among March indicators, the BTS and the PMI data also signal that the weak production outlook may
continue. External demand remains weak due to slowing global economy and geopolitical tensions.
Accordingly, economic activity is envisaged to follow a sluggish course in the first quarter of 2015 and
then settle into a gradual track of moderate recovery. Downside risks regarding external demand
persist due to geopolitical developments, while the signals for recovery in Europe suggest a favorable
outlook for exports. On the production side, growth may be boosted by agriculture provided that
accommodative weather conditions increase agricultural added value alongside the base effect
caused by the decline in 2014.
The re-balancing of the current account that started in 2011 is projected to continue in 2015. The
low levels of international energy prices cause a notable decline in energy import costs and support
the external trade balance (Chart 1.2.7). Moreover, the cautious monetary policy stance and the
macroprudential measures bring loan growth rates to reasonable levels and improve the loan
composition in favor of commercial loans, thus contributing to the re-balancing of the current account
deficit. Accordingly, import coverage ratio of exports has been improving significantly (Chart 1.2.8).
Chart 1.2.7.
Chart 1.2.8.
Current Account Balance
Export/Import Coverage Ratio
(12-Month Cumulative, Billion USD)
Current Account Balance
Current Account Balance (excl. gold)
Current Account Balance (excl. energy and gold)
30
30
(12-Month Cumulative, Percent)
Coverage Ratio (excl. gold)
Coverage Ratio
75
75
70
70
65
65
60
60
50
50
0109
0509
0909
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
-90
0215
-90
0814
55
0214
55
0813
-70
0213
-70
0812
-50
0212
-50
0811
-30
0211
-30
0810
-10
0210
-10
0809
10
0209
10
Source: CBRT.
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Inflation Report 2015-II
Central Bank of the Republic of Turkey
Oil, Import and Food Prices
In the first quarter of 2015, oil and import prices remained above projections, while USDdenominated import prices stood below the previous report’s forecasts (Charts 1.2.9 and 1.2.10).
Accordingly, average medium-term oil assumptions were revised upwards by 9 percent for 2015 and 5
percent for 2016. Considering the possibility of a correction in food prices, especially in unprocessed
food, the end-2015 food inflation forecast was left unchanged at 9 percent.
Chart 1.2.9. Revisions in Oil Prices*
Chart 1.2.10. Revisions in Import Prices*
(USD/bbl)
(USD, 2010=100)
April 2015
130
April 2015
120
January 2015
120
120
110
110
100
100
90
90
80
80
70
70
60
115
115
110
110
105
105
100
100
Actual
60
Actual
95
90
90
1015
0715
0415
0115
1014
0714
0114
1013
0713
0413
1015
0715
0415
0115
1014
0714
0414
0114
1013
0713
40
0413
40
0113
95
50
0113
50
120
January 2015
0414
130
* Shaded region denotes the forecast horizon.
Source: TurkStat, CBRT.
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that tax adjustments and administered
prices are consistent with inflation targets and automatic pricing mechanisms. The medium-term fiscal
policy stance is based on the MTP projections covering the 2015-2017 period. Accordingly, it is assumed
that a cautious fiscal stance will be implemented and the primary expenditures to the GDP ratio will
decrease gradually.
1.3. Inflation and the Monetary Policy Outlook
Medium-term forecasts are based on the framework that a cautious monetary policy stance will
be maintained by keeping the yield curve flat until there is a significant improvement in the inflation
outlook. Moreover, the annual loan growth rate is envisioned to continue to hover around the recent
reasonable levels in 2015, also thanks to the macroprudential measures. Accordingly, inflation is
expected to be, with 70 percent probability, between 5.6 percent and 8 percent (with a mid-point of
6.8 percent) at end-2015 and between 3.7 percent and 7.3 percent (with a mid-point of 5.5 percent)
at end-2016. Inflation is projected to stabilize around 5 percent in the medium term (Chart 1.3.1).
Inflation Report 2015-II
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Central Bank of the Republic of Turkey
Chart 1.3.1.
Inflation and Output Gap Forecasts*
(Percent)
Forecast Range
Uncertainty Band
Year-End Inflation Targets
Output Gap
12
12
10
10
Control
Horizon
0318
1217
0917
0617
-4
0317
-4
1216
-2
0916
-2
0616
0
0316
0
1215
2
0915
2
0615
4
0315
4
1214
6
0914
6
0614
8
0314
8
* Shaded region denotes the 70 percent confidence interval for the forecast.
Source: CBRT.
The end-2015 inflation forecast, which was presented as 5.5 percent in the January Inflation
Report, was revised upwards by 1.3 points (Chart 1.3.1). This revision was led by the higher-thanprojected oil prices compared to the figures in the January Inflation Report besides the import prices in
TL. Accordingly, the revision in oil prices and the movements in TL-denominated import prices are
estimated to push the year-end inflation forecast by 0.4 and 1 points, respectively. The downward
revision in economic activity and the output gap, on the other hand, lowered the end-2015 inflation
forecast by 0.1 point. Moreover, the end-2016 inflation forecast, which was set as 5 percent in the
previous report, was revised upwards to 5.5 percent. Of this revision, 0.3 points are attributed to the
lagged effects of the developments in TL-denominated import prices and 0.2 points are due to the
upward revision in the oil prices for 2016.
Base effects will continue to determine the course of inflation for the rest of 2015, causing a rise
in annual inflation starting from August. Accordingly, annual inflation is envisaged to decline until the
third quarter, and increase slightly afterwards, reaching 6.8 percent in the last quarter.
1.4. Risks and Monetary Policy
Loans continue to grow at reasonable levels amid the tight monetary policy stance and
macroprudential measures. The composition of loans is moving in the favored direction as well.
Commercial loans are growing faster than consumer loans on an annual basis. This loan outlook not
only limits medium-term inflationary pressures but also contributes to the improvement in the current
account balance.
The weak external demand caused by the sluggish growth across European countries, the
largest export market for Turkey, and geopolitical developments in neighboring countries continues to
limit the growth of exports. In addition to the weak external demand, the recent plunge in the value of
the euro against the US dollar may have an adverse impact on firms that export in euro, but Turkey’s
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Inflation Report 2015-II
Central Bank of the Republic of Turkey
share in the European market remains robust. The recent signs of recovery for the European economy
might be a development that would boost the external demand.
Economic activity lost some pace in the first quarter. This slowdown was largely due to the weak
external demand, volatility in financial markets and adverse weather conditions. Although economic
activity is expected to grow gradually and moderately from the second quarter onwards, downside
risks remain important. Lingering volatility in global financial markets and the weak course of
confidence indices are the risk factors that may limit the contribution of the private sector final
demand to growth. In case of an additional slowdown in external demand and a sizeable decline in
global growth rates, the decrease in commodity prices will pull inflation down but at the same time
lead to notable adverse effects on domestic economic activity. Under such circumstances, the CBRT
will employ the policy tools to support the economy.
The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies
are having a favorable impact on inflation, especially inflation excluding energy and food (core
inflation indicators). Low levels of international commodity prices and the moderate course of
aggregate demand conditions support disinflation. The annual inflation of core indicators is projected
to decline further, also with the contribution of base effects. However, the recent exchange rate
movements may have an adverse impact on the core inflation outlook.
Food prices remain as the main risk factor on the inflation forecast. Although food inflation is
expected to remain high in the short term according to the baseline scenario, food prices are likely to
see a notable correction upon the introduction of new season products in the summer months.
Moreover, measures that may be proposed by the Food Committee are estimated to contribute to the
decline in the food inflation in the upcoming period. However, prices of some food items are sensitive
to the exchange rate and there are uncertainties over supply-side developments, which necessitate
caution against food inflation.
Global financial markets continue to follow a volatile course. The reduced predictability of the
global economy and increased uncertainties amid the divergence among the monetary policies of
advanced economies cause global markets to remain highly data-sensitive. Against this background,
the volatility in the risk appetite and capital flows continues. The CBRT emphasized that measures have
been taken recently in the FX liquidity, intermediation costs and prudential borrowing aimed at
reducing macrofinancial risks stemming from uncertainties regarding global financial markets and the
course of economic activity. Macrofinancial risks will be closely monitored in the upcoming period and
additional measures will be taken when deemed necessary.
In sum, the uncertainty in global markets and elevated food prices necessitates maintaining the
cautious stance in monetary policy. Future monetary policy decisions will be conditional on the pace
of improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that
affect inflation will be monitored closely and the cautious monetary policy stance will be maintained
by keeping the yield curve flat, until there is a significant improvement in the inflation outlook.
Developments in the fiscal policy and tax adjustments are monitored closely with regard to their
effects on the inflation outlook. The baseline monetary policy stance is formulated under the
assumption that fiscal discipline will be maintained and there will be no unanticipated hikes on
Inflation Report 2015-II
9
Central Bank of the Republic of Turkey
administered prices. A revision of the monetary policy stance may be considered, should the fiscal
policy deviate significantly from this framework, and consequently, have an adverse effect on the
medium-term inflation outlook.
Implementation of the announced structural reforms is considered to contribute to the potential
growth significantly. Measures to ensure the sustainability of the fiscal discipline and reduce the savings
deficit are envisioned to support macroeconomic stability and boost the social welfare by keeping
interest rates of long-term government securities at low levels.
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Inflation Report 2015-II