Download 1. O verview

Central Bank of the Republic of Turkey
1. Overview
In the recent period, the global volatility has continued to decline and global financial
conditions have improved (Chart 1.1). The deceleration in global economic activity and the ongoing
low levels of inflation have led the central banks of advanced economies to continue with their
accommodative policies. The Fed stated that policy rate hikes would be slower, while the ECB and the
Bank of Japan announced new easing measures. Moreover, uncertainties related to the Chinese
economy lessened recently. Against this background, financial conditions in emerging economies
have improved as well. Portfolio flows towards these countries posted a rebound, while risk premiums
and market interest rates decreased and their currencies appreciated (Chart 1.2).
Chart 1.1.
Chart 1.2.
VIX and MOVE Volatility Indices
Portfolio Flows to Emerging Economies and
JPMVXYEM Volatility Index
Equity Funds
Bond Funds
JPMVXYEM (right axis)
VIX
Source: Bloomberg.
5
-10
4
0416
6
-8
0116
7
-6
1015
0416
0116
1015
0715
0415
0115
1014
0714
0414
0114
1013
0713
20
0413
10
0113
15
40
0715
20
8
-4
0415
60
9
-2
0115
80
25
10
0
1014
30
11
2
0414
100
12
4
0114
35
13
6
1013
120
0713
40
8
0413
140
MOVE Index (right axis)
0113
45
0714
(Basis Points)
Source: EPFR, Bloomberg.
Favorable developments in global markets had positive reverberations on the Turkish economy
as well. Moreover, the recently released data disclose a sustained trend of recovery in
macroeconomic indicators. Inflation saw a notable decline driven mostly by unprocessed food prices,
while cumulative exchange rate effects waned, which led core inflation to improve to some extent.
The current account deficit continued to decrease in this period, while the released data and the
leading indicators showed that economic activity sustained a moderate and stable course of growth.
Against these developments, the CBRT maintained its policy stance, which is tight against the inflation
outlook, stabilizing for the foreign exchange liquidity and supportive of financial stability while steps
were taken towards simplification of the monetary policy.
1.1. Monetary Policy and Financial Conditions
In the first quarter of 2016, the CBRT maintained the tight liquidity policy stance on account of
inflation expectations, pricing behavior and other factors affecting inflation. In addition to alleviated
global volatilities, the effective use of policy tools described in the road map released in August 2015
reduced the need for a wide interest rate corridor. Accordingly, the CBRT decided to take moderate
steps towards simplification by reducing the marginal funding rate by 25 basis points in March and by
50 basis points in April. The one-week repo auction rate and overnight borrowing rate were kept
unchanged at 7.5 and 7.25 percent, respectively (Chart 1.1.1).
Inflation Report 2016-II
1
Central Bank of the Republic of Turkey
One-week repo auctions continued to be the main tool for the CBRT funding, while the share
of the marginal funding remained high (Chart 1.1.2). The weighted average funding rate, which hit 9.1
percent in February 2016, receded to approximately 8.6 percent in April. Interbank overnight repo rates
recorded a decline parallel to the total reduction of 75 basis points in the upper band of the interest
rate corridor. In the upcoming period, the monetary policy stance will remain dependent on the
inflation outlook. Taking into account inflation expectations, the pricing behavior and the course of
other factors affecting inflation, the CBRT will maintain the tight monetary policy stance as long as
deemed necessary.
Chart 1.1.1.
Chart 1.1.2.
CBRT Rates and BIST Interbank O/N Repo Rates
CBRT Funding*
(Percent)
(2-Week Moving Average, Billion TL)
Marginal Funding
O/N Funding
1-Week Repo
1-Month Repo
Net Open Market Operations
Interest Rate Corridor
CBRT Average Funding Rate (5-day moving average)
120
BIST O/N Repo Rates (5-day moving average)
1-Week Repo Rate
100
120
100
0416
0216
1215
1015
0815
0615
0415
0215
1214
1014
0814
0
6
0614
0
6
0414
20
0214
20
7
1213
8
7
1013
8
0416
40
0216
40
1215
9
1015
9
0815
60
0615
60
10
0415
11
10
0215
11
1214
80
1014
80
0814
12
0614
12
0414
13
0214
13
* Marginal funding is overnight funding provided at the upper band of the
interest rate corridor.
Source: CBRT.
Source: BIST, CBRT.
The yield curve shifted downwards in all maturities (Chart 1.1.3). This was led by the sustained
accommodative policy stances of the emerging market central banks, the strengthened perception
that interest rates in these economies will remain low for a prolonged period, waning global
uncertainties and improvement in global financial conditions. The favorable course of macroeconomic
indicators in Turkey, the fall in market-based and survey-based inflation expectations and reductions in
the marginal funding rate also contributed to this development. The slope of the yield curve remained
almost flat in this period.
Chart 1.1.3.
Chart 1.1.4.
Yield Curve
Implied FX Volatility*
(1-Month, Percent)
30
30
Source: Bloomberg.
2
10
5
5
0
0
1015
10
0815
15
0615
15
0415
20
0215
20
1214
25
1014
9.00
25
0614
9.00
10.00
9.25
9.00
9.25
8.00
9.50
7.00
9.50
5.00
9.75
4.00
9.75
3.00
10.00
2.00
10.00
1.00
10.25
0.50
10.25
0.25
10.50
0414
April 1-22
10.50
0214
10.75
Maturity (Year)
Turkey
Emerging Economies
January 26-April 22
10.75
0416
11.00
0814
11.00
0216
January 26-March 31
1215
(Percent)
*Emerging economies include Brazil, Chile, Czech Republic, Hungary,
India, Mexico, Poland, South Africa, Indonesia, Romania and Colombia.
Source: Bloomberg.
Inflation Report 2016-II
Central Bank of the Republic of Turkey
It is important to contain negative spillovers of global developments into the Turkish economy. In
terms of the economic fundamentals, the significant improvement in the current account balance
over the past few years, reasonable growth rates in loans and a loan composition that supports price
stability and financial stability, all contributed to reducing economic fragilities. Maintenance of the
fiscal discipline also stood among the main factors enhancing the resilience of the economy in this
period. Moreover, the effective implementation of the measures laid out in the August road map has
alleviated the excessive fluctuations in exchange rates and loan rates (Chart 1.1.4). The current tight
monetary policy stance reduces the economy’s sensitivity to global shocks, thus supporting financial
stability. The CBRT maintains the view that tight monetary policy may be implemented within a
narrower interest rate corridor, should the global volatility decline persistently or policy measures that
would maintain and improve the gains in external balance and financial stability be implemented
effectively. Accordingly, additional simplification steps may be taken in the upcoming period when
circumstances allow.
The annual growth rate of loans extended to the non-financial sector, which decelerated partly
due to the CBRT’s tight monetary policy stance and the macroprudential measures introduced by the
BRSA regarding consumer loans excluding mortgages, fell to 10.9 percent in the first quarter of 2016
(Chart 1.1.5). In this period, commercial loans continued to grow at a higher rate than consumer loans
as they have since the start of 2014. These developments in loan growth and composition not only
contribute to the re-balancing process and financial stability, but also limit the cost-side pressures on
inflation. The annualized growth rates in 13-week averages show that both consumer and commercial
loans have displayed a trend of rebound since early 2016 (Chart 1.1.6). The adjustments made to the
risk weights of consumer loans, wage developments and improvement in financial conditions can
support the credit growth in the upcoming period. However, owing to the tight monetary policy stance
and macroprudential policy framework, annual loan growth rates are expected to remain at
reasonable levels in the months to come.
Chart 1.1.5.
Chart 1.1.6.
Annual Loan Growth
Annualized Loan Growth (Adjusted for Exchange Rate, 13-
Commercial
Total
Week Moving Average, Percent)
Consumer
30
30
25
25
20
20
15
15
10
10
5
0112
0412
0712
1012
0113
0413
0713
1013
0114
0414
0714
1014
0115
0415
0715
1015
0116
0416
5
40
Commercial
Total
Consumer
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
0112
0412
0712
1012
0113
0413
0713
1013
0114
0414
0714
1014
0115
0415
0715
1015
0116
0416
(Adjusted for Exchange Rate, Annual Percent Change)
Source: CBRT.
Inflation Report 2016-II
3
Central Bank of the Republic of Turkey
1.2. Macroeconomic Developments and Main Assumptions
Inflation
In the first quarter of 2016, consumer inflation fell by 1.35 points quarter-on-quarter to 7.46
percent, and stood below the January Inflation Report forecasts (Chart 1.2.1). The higher-thanexpected fall in annual inflation was mainly driven by unprocessed food prices. In fact, inflation
excluding unprocessed food and tobacco was consistent with the January Inflation Report forecast
(Chart 1.2.2). In this period, effects of the cumulative depreciation in the Turkish lira on annual inflation
continued to diminish and import prices remained low, leading to a limited decline in annual inflation in
core goods and energy. On the other hand, adjustments to administered prices, high levels of inflation
expectations and wage developments limited the fall in inflation.
Chart 1.2.1.
Chart 1.2.2.
Inflation Forecasts and Realizations*
Inflation Forecasts and Realizations Excluding
Unprocessed Food and Tobacco* (Percent)
6
6
5
5
0316
7
Realization
1215
7
0316
8
1215
8
0915
9
0615
9
0315
10
0915
January Inflation Report Forecasts
Realization
0315
January Inflation Report Forecasts
10
0615
(Percent)
* Shaded area denotes the 70 percent confidence interval for the forecast.
Source: TURKSTAT, CBRT.
Mild weather conditions in the first quarter increased the supply of fresh fruits and vegetables,
which pulled unprocessed food prices remarkably down. Unprocessed food products other than fresh
fruits and vegetables were also effective in this decline. This is also attributed to the adopted measures
for certain products, especially red meat. As a result, plummeting to 6.31 percent in the first quarter
amid the sharp decrease in food inflation, annual inflation in food and catering services stood below
consumer inflation excluding food and catering services after three years (Chart 1.2.3).
Due to the waning cumulative exchange rate effects in the first quarter, the core goods inflation
exhibited a significant improvement. In the same period, services inflation remained elevated due to
the increases in items sensitive to the exchange rate accompanied by wage developments and the
rigidity caused by high levels of the headline inflation. Accordingly, the underlying core inflation
indicators witnessed a notable slowdown driven by the prices of core goods (Chart 1.2.4). In sum,
improvement in food inflation coupled with the favorable course of import prices led to a marked
decrease in the consumer inflation in the first quarter. However, due to the cumulative exchange rate
effects and particularly the rigidities in the services inflation, the desired improvement in core indicators
is yet to be seen.
4
Inflation Report 2016-II
Central Bank of the Republic of Turkey
Chart 1.2.3.
Chart 1.2.4.
Food and Non-Food Prices
Core Inflation Indicators
(Annual Percent Change)
(Seasonally Adjusted, 3-Month Moving Average,
Annualized, Percent)
Food and Catering Services
H
I
CPI (excl. food and catering services)
4
0116
4
1015
6
0715
6
0415
8
0115
8
1014
10
0714
10
0414
12
0114
12
1013
0
14
0713
0
14
0413
2
16
0113
2
16
0116
4
1015
4
0715
6
0415
6
0115
8
1014
8
0714
10
0414
10
0114
12
1013
14
12
0713
14
0413
16
0113
16
Source: TURKSTAT, CBRT.
Supply and Demand
According to the GDP data of the fourth quarter of 2015, economic activity was in line with the
outlook presented in the January Inflation Report, and the GDP grew by 0.7 and 5.7 percent in
quarterly and annual terms, respectively (Chart 1.2.5). Thus, growth stood at 4.0 percent in 2015. On the
spending front, final domestic demand was the main driver of growth in the last quarter, and net
exports contributed positively to the GDP growth after a four-quarter break (Chart 1.2.6).
Chart 1.2.5.
Chart 1.2.6.
GDP and Final Domestic Demand
Annual GDP Growth and Contributions from the
Demand Side (Percentage Points)
(Real, Seasonally Adjusted, Billion TL)
Net Exports
Change in Inventories
Final Domestic Demand
GDP
Final Domestic Demand
34
34
Millions
GDP
20
20
15
15
30
10
10
28
28
5
5
26
26
0
0
-5
-5
32
32
30
24
24
-10
22
22
123412341234123412341234123412341234
-10
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2010
2011
2012
2013
2014
2015
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: TURKSTAT.
Data on the first quarter of 2016 indicate that the mild and steady increase in economic activity
continues. Industrial production saw successive monthly increases in the December-February period.
Thus, production stood 1.6 percent above the figures of the previous quarter in the January-February
period. The first-quarter data disclose contributions to growth offered by both domestic and external
demand.
Inflation Report 2016-II
5
Central Bank of the Republic of Turkey
Based on the demand outlook for 2016, economic activity is expected to be stronger than that
in 2015. Owing to the strong employment performance following the global crisis and the increase in
the minimum wage in early 2016, the income channel is expected to support domestic demand. Amid
waning domestic uncertainties compared to 2015, rising consumer and investor confidence may boost
domestic demand. Sustained easing in global volatilities and the improvement in global financial
conditions have a favorable effect on domestic financial conditions. Against this background, income
and confidence channels and financial conditions are likely to support domestic demand in the
upcoming period. Downside risks to exports of services have recently grown amid continuing risks to
external demand due to geopolitical developments and languishing global growth. Rising demand
from the EU, on the other hand, continues to support our exports at a stronger pace (Chart 1.2.7).
Overall, domestic demand is expected to be slightly stronger in 2016 relative to 2015, while
external demand is recovering on the back of rising EU demand despite geopolitical risks. The current
account deficit is likely to narrow further thanks to ongoing macroprudential policy measures and
favorable developments in the terms of trade (Chart 1.2.8). A narrower current account deficit and
strong public finances provide room for policy responses against possible shocks.
Chart 1.2.7.
Chart 1.2.8.
EU Imports
Current Account Balance
(Real, Seasonally Adjusted, 3-Month Average, 2010=100)
EU Imports from Non-EU Countries
(12-Month Cumulative, Billion USD)
Current Account Balance
Current Account Balance (excl. gold)
EU Imports from Turkey
Source: Eurostat.
0216
-90
0815
-90
0215
-70
0814
-70
0214
-50
0813
-50
0213
-30
0812
-30
0212
-10
0811
-10
0211
10
0810
60
10
0210
60
Current Account Balance (excl. energy and gold)
30
0809
70
30
0209
70
0116
80
0115
90
80
0114
90
0113
100
0112
110
100
0111
110
0110
120
0109
120
0108
130
0107
140
130
0106
140
0105
150
0104
150
Source: CBRT.
Oil, Import and Food Prices
Oil prices edged up in the inter-reporting period, whereas the downtrend in international
commodity prices continued into the first quarter of 2016. Thus, compared to January, assumptions for
crude oil prices were revised up while those for USD-denominated import prices were revised down
(Chart 1.2.9). With regard to annual averages, the crude oil price assumption was increased from 37 to
40 USD for 2016. Also, assumptions for annual percentage changes in average import prices were
revised downwards by 3.4 points for 2016. Food inflation saw a marked decline due to unprocessed
food prices in the first quarter, which is expected to continue in the short term. However, given the high
volatility in unprocessed food prices, the assumption for food price inflation was kept unchanged at 9
percent for 2016 and at 8 percent for 2017.
6
Inflation Report 2016-II
Central Bank of the Republic of Turkey
Chart 1.2.9.
Chart 1.2.10.
Revisions in Oil Prices*
Revisions in Import Prices*
(USD/bbl)
(USD, 2010=100)
120
120
April 2016
120
120
April 2016
January 2016
January 2016
100
110
80
100
100
60
60
90
90
40
40
80
100
80
110
Realization
80
Realization
70
70
0814
1014
1214
0215
0415
0615
0815
1015
1215
0216
0416
0616
0816
1016
1216
0217
0417
0617
0817
1017
1217
20
0814
1014
1214
0215
0415
0615
0815
1015
1215
0216
0416
0616
0816
1016
1216
0217
0417
0617
0817
1017
1217
20
* Shaded area denotes the forecast horizon.
Source: Bloomberg, CBRT.
Fiscal Policy and Tax Adjustments
Medium-term forecasts are based on an outlook that adjustments to taxes and administered
prices will be consistent with the inflation target and automatic pricing mechanisms. The medium-term
fiscal policy stance depends on the MTP projections covering the 2016-2018 period. The effects of the
minimum wage rise at the beginning of 2016 on producer costs, aggregate demand and inflation are
being closely monitored.
1.3. Inflation and Monetary Policy Outlook
In view of the above economic conditions, policy stance and assumptions, inflation forecasts for
the upcoming period are left unchanged from the previous Report. Given a decisive policy stance that
focuses on reducing inflation, the 5-percent inflation target is expected to be achieved gradually;
inflation is likely to stabilize around 5 percent as of 2018 after falling to 7.5 percent in 2016 and to 6
percent in 2017. Accordingly, inflation is expected to be, with 70 percent probability, between 6.3
percent and 8.7 percent (with a mid-point of 7.5 percent) at end-2016 and between 4.2 percent and
7.8 percent (with a mid-point of 6 percent) at end-2017 (Chart 1.3.1).
Chart 1.3.1.
Inflation and Output Gap Forecasts*
(Percent)
Forecast Range
Uncertainty Band
Year-End Inflation Targets
Output Gap
12
12
10
10
Forecast
Horizon
8
8
0319
1218
0918
0618
0318
1217
-4
0917
-4
0617
-2
0317
-2
1216
0
0916
0
0616
2
0316
2
1215
4
0915
4
0615
6
0315
6
* Shaded area denotes the 70 percent confidence interval for the forecast.
Source: CBRT.
Inflation Report 2016-II
7
Central Bank of the Republic of Turkey
The Turkish lira maintained a steady pattern following the January Inflation Report, while oil
prices inched up and import prices edged down. Accordingly, the impact of TL import prices was not
significant enough to lead to any change in inflation forecasts. Food prices are expected to drive
consumer inflation further down in the short term. Rising later amid base effects, inflation is expected to
follow a volatile course in the second half of 2016 and end the year at 7.5 percent. Given the high
volatility in food prices, assumptions for food inflation are preserved, yet it should be noted that there
are downside risks posed by food prices to the year-end inflation forecast.
1.4. Risks and Monetary Policy
Annual loan growth continues at reasonable levels in response to the tight monetary policy
stance and macroprudential measures. After slowing down in the fourth quarter of 2015, particularly for
consumer loans, the growth trend of loans picked up in the first quarter of 2016. Risk weight and
minimum wage arrangements and improving financial conditions are likely to boost loan growth in the
upcoming period via loan supply and household income channels. Thus, annual loan growth rates are
expected to remain at reasonable levels. With respect to the composition of loans, commercial loans
continue to grow faster than consumer loans. This composition not only limits medium-term inflationary
pressures but also supports the improvement in the current account balance.
Recent data and the leading indicators show that economic activity displays a moderate and
stable course of growth. In the forthcoming period, domestic demand is likely to contribute more
strongly to growth while the growing EU demand will further stimulate exports in spite of geopolitical
risks. Strengthened investor and consumer confidence driven by reduced domestic uncertainties,
recently improved financial conditions, robust post-crisis employment performance, and the early 2016
minimum wage hike are all expected to support domestic demand. On the foreign demand front,
geopolitical developments and weaker global growth continue to pose downside risks, with those to
exports of services recently being on the rise. Nevertheless, the economic recovery in Europe and the
market flexibility of our exports contain these downside risks. In fact, the rising EU demand has had a
favorable effect on exports recently, which is conducive for both economic growth and re-balancing
prospects. Moreover, improvements in the terms of trade mainly led by the cumulative fall in
commodity prices, coupled with the modest course of consumer loans, support the improvement in the
current account balance. Against this background, the monetary policy stance is based on an
outlook, where economic activity will remain on a moderate growth path while the current account
deficit will narrow further, albeit at a slower pace.
The CBRT assesses that the effective use of the policy tools announced in the road map of
August 2015 bolsters the resilience of the economy against global shocks. The introduction of these
new instruments helped to curb the excessive volatility in both exchange rates and credits. In fact, the
relative volatility of the Turkish lira has decreased notably since September compared to other
emerging market currencies. This process is supported by the gradually falling demand for foreign
exchange amid the improving current account balance and lower energy prices. Also, foreign
currency liquidity instruments are used to stabilize the value of the Turkish lira. All these developments
alleviate the need for a wide interest rate corridor.
8
Inflation Report 2016-II
Central Bank of the Republic of Turkey
Other factors that have recently reduced the need for a wide interest rate corridor are the
continued decline in global volatility and the improving global financial conditions. Mounting prospects
for a slow global economic recovery and the sustained monetary easing by central banks in
advanced economies have recently fostered the expectations of a prolonged period of low interest
rates across advanced economies. Accordingly, capital flows into emerging economies increased
while risk premiums and market interest rates fell significantly.
In sum, the recent lasting decline in global volatility and the effective use of the policy
instruments laid out in the road map announced in August 2015 have reduced the need for a wide
interest rate corridor. Thus, the CBRT took measured steps towards simplification by lowering the
marginal funding rate.
On the other hand, the improvement in the underlying trend of core inflation remains limited,
necessitating the maintenance of the tight liquidity policy stance. Although recent developments
regarding imported input costs have eased the upside risks to the inflation outlook, the improvement in
core inflation is still limited. The lagged effects of cumulative exchange rate movements, high levels of
inflation expectations and wage developments restrain the improvement in the underlying trend of
inflation. Food inflation has recently seen a marked decline on the back of unprocessed food prices.
The falling food inflation led to a decrease in consumer inflation as well, which is expected to continue
in the short run. Yet, given the high volatility in unprocessed food prices, it is important to remain
cautious about the inflation outlook. Hence, the CBRT stated that the current tight liquidity stance
should be maintained in order to ensure that the recently observed disinflation becomes permanent.
In the upcoming period, monetary policy stance will be conditional on the inflation outlook.
Taking into account inflation expectations, the pricing behavior and the course of other factors
affecting inflation, the tight monetary policy stance will be maintained. Moreover, global and domestic
volatilities will be monitored closely and necessary measures will be taken for the foreign exchange
and Turkish lira markets. In sum, the policy stance will remain tight against the inflation outlook,
stabilizing for the FX liquidity and supportive of the financial stability.
Notwithstanding the significant external shocks in recent years, the current policy framework
limited the worsening in inflation and inflation expectations. However, price stability is yet to be
achieved. Ten years of experience with inflation targeting has shown that the fight against inflation
requires collaboration from all relevant parties. Therefore, bringing inflation permanently down to the 5percent target requires all institutions to continue resolutely with the efforts made in recent years.
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 in
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.
Sustained fiscal discipline has become essential in reducing the sensitivity of the Turkish economy
against external shocks in recent years. In the current environment of highly uncertain global markets,
the gains from maintaining and further advancing these achievements are significant. Any measure
Inflation Report 2016-II
9
Central Bank of the Republic of Turkey
that would ensure the sustainability of fiscal discipline and reduce the savings deficit will support
macroeconomic stability and contribute positively to social welfare by keeping interest rates of longterm government securities at low levels.
10
Inflation Report 2016-II