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Central Bank of the Republic of Turkey
1. Overview
Global financial markets remained volatile in the second quarter of 2015, which was attributed
to the continued divergence among global monetary policies, the uncertainty surrounding the Fed’s
normalization plans and developments regarding the Greek debt crisis in the EU. In this period, the
volatility in long-term rates surged significantly, especially across advanced economies (Chart 1.1),
which also affected emerging market rates. Thus, portfolio flows to emerging markets weakened
(Chart 1.2). The global economic slowdown of 2014 continued into the first quarter of 2015 largely due
to emerging economies. Despite signs of economic recovery in Europe, geopolitical tensions continued
to restrain Turkey’s external demand.
The volatility across global markets had implications for the Turkish economy as well, causing
fluctuations in financial indicators amid domestic uncertainty. In this period of heightened long-term
interest rate volatility in advanced economies and added interest rate sensitivity in emerging
economies, the interest rate corridor and the tight liquidity policy implemented by the CBRT played a
major role in shielding the economy against global shocks. Moreover, the CBRT’s structural and cyclical
measures supporting FX liquidity, core liabilities and long-term borrowing strengthened the economy’s
resilience.
Chart 1.1.
Chart 1.2.
US Interest Rate Volatility
Portfolio Flows to Emerging Economies and JPMVXYEM
Volatility Index
(Basis Points)
Equity Funds (4-week moving average, billion USD)
Bond Funds (4-week moving average, billion USD)
Source: Bloomberg.
0715
4
0415
5
-10
0115
0715
0415
0115
1014
0714
0414
0114
1013
0713
0413
0113
1012
30
0712
30
6
-8
1014
50
7
-6
0714
50
8
-4
0414
70
9
-2
0114
70
10
0
1013
90
11
2
0713
90
12
4
0413
110
13
JPMVXYEM (percent, right axis)
6
0113
110
8
1012
130
0712
130
Source: EPFR, Bloomberg.
The growth in economic activity during the first quarter of 2015 was mainly driven by
consumption spending. In this period, exports of goods and services increased quarter-on-quarter
whereas imports decreased, thus helping net exports to contribute positively to quarterly growth.
Indicators for the second quarter suggest that economic activity continues to grow moderately. The
global economic slowdown and geopolitical problems cause external demand to remain weak while
domestic demand provides a moderate support to growth. Therefore, economic activity is expected
to follow a moderate and gradual growth path in the upcoming period. Although inflation decreased
on lower food prices in the second quarter of 2015, the accompanying depreciation of the Turkish lira
caused core goods inflation to rise, delaying the desired improvement in the inflation outlook. The
prospective partial improvement in food prices and the cautious monetary policy stance will help to
Inflation Report 2015-III
1
Central Bank of the Republic of Turkey
minimize the deterioration in the inflation outlook. Inflation is expected to reach the target over the
medium term.
1.1. Monetary Policy and Financial Conditions
In view of the uncertainty over global markets and the volatility in food and energy prices, the
CBRT maintained its cautious monetary policy stance in the second quarter of 2015. In this period, the
CBRT kept interest rates unchanged, but continued with its tight liquidity policy to contain risks to core
goods inflation and inflation expectations. To meet the recently growing liquidity need, the weight of
marginal funding was increased, which in turn increased the CBRT average funding rate (Chart 1.1.1).
The CBRT average funding rate has been hovering around 8.5 percent since mid-June (Chart 1.1.2).
The BIST overnight repo rates, on the other hand, remained close to the upper band of the interest rate
corridor as in the previous reporting period.
Chart 1.1.1.
Chart 1.1.2.
CBRT Funding
CBRT Rates and BIST Repo Rates
(2-Week Moving Average, Billion TL)
Marginal Funding
O/N Funding
1-Week Repo
1-Month Repo
Reverse Repo at the BIST and Interbank Money Market
Net OMO
80
80
(Percent)
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
0615
0415
0215
1214
1014
0814
0614
0414
0214
1213
-10
1013
-10
CBRT Average Funding Rate (5-day moving average)
BIST O/N Repo Rates (5-day moving average)
1-Week Repo Rate
14
14
12
12
10
10
8
8
6
6
4
4
2
2
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0814
0914
1014
1114
1214
0115
0215
0315
0415
0515
0615
0715
70
Interest Rate Corridor
Source: BIST, CBRT.
The Turkish lira liquidity need of the banking system is met by both CBRT funds and short-term
funds obtained from various markets. Among the non-CBRT funds with up to one-week maturity, funds
from the swap market constitute the largest share, which is followed by transactions with banks and
with other intermediaries at the BIST Repo and Reverse Repo Market (Chart 1.1.3). The weightedaverage market funding rate calculated by using the transaction volumes and interest rates at these
markets closely follows the overnight rate at the BIST Interbank Money Market determined by the
CBRT’s interest rate and liquidity policies (Chart 1.1.4). The effective funding rate measured by using the
respective weights of CBRT and non-CBRT funds in total funds hovers around 9.3 percent as of July,
surpassing the CBRT average rate of about 8.5 percent and reflecting the recent increases in the CBRT
average funding rate.
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Inflation Report 2015-III
Central Bank of the Republic of Turkey
Chart 1.1.3.
Chart 1.1.4.
Non-CBRT Funding
Bank’s Funding Costs at the Money Markets
(2-Week Moving Average, Billion TL)
(5-Day Moving Average, Percent)
BIST O/N Interbank Money Market
Interest Rate Corridor
CBRT Average Funding Rate
BIST O/N Repo Rates
Money Market Weekly Effective Funding Rate
Money Market Weekly Effective Funding Rate (excl. CBRT funding)
BIST O/N Repo and Reverse Repo
Swap (up to 1-week maturity)
14
12
12
10
10
40
8
8
30
30
6
6
20
20
4
4
10
10
0
0
2
2
70
60
60
50
50
40
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0814
0914
1014
1114
1214
0115
0215
0315
0415
0515
0615
0715
80
70
1013
1113
1213
0114
0214
0314
0414
0514
0614
0714
0814
0914
1014
1114
1214
0115
0215
0315
0415
0515
0615
0715
14
80
Source: BIST, CBRT.
Thanks to the cautious monetary policy stance, the yield curve remained nearly flat. Although
the yield curve has remained basically unchanged since the publication of the previous Inflation
Report, there was a slight increase in the market rates with more than two-year maturity (Chart 1.1.5).
Thus, the spread between the overnight repo rates at the BIST Interbank Money Market and 5-year
market rates has narrowed somewhat (Chart 1.1.6). The CBRT reiterated that 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 a flat yield curve until there is a significant
improvement in the inflation outlook.
Chart 1.1.5.
Chart 1.1.6.
Yield Curve
Market Rates
(Percent)
(Percent)
5-Year Market Rates - BIST O/N Rates
1-28 July
10.5
BIST O/N Rates (5-day moving average)
10.5
10.0
10.0
9.5
9.5
9.0
9.0
Maturity (Year)
9.00
10.00
8.00
7.00
5.00
4.00
3.00
2.00
1.00
0.50
8.5
0.25
8.5
14
5-Year Market Rates
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0914
1114
0115
0315
0515
0715
1 May-28 July
Source: Bloomberg.
The wide interest rate corridor and the CBRT’s tight liquidity policy reduce the economy’s
sensitivity to global shocks, thus supporting financial stability and facilitating the attainment of the price
stability objective. In the post-crisis period, the unconventional policies of advanced economies and
the ongoing uncertainties over global monetary policies caused long-term interest rates in these
economies to fluctuate. In addition, emerging market rates have become extremely sensitive to global
monetary policy developments. To contain repercussions on the Turkish economy, the CBRT designed a
Inflation Report 2015-III
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Central Bank of the Republic of Turkey
monetary policy framework that is composed of a wide interest rate corridor and an active liquidity
policy. The CBRT’s wide interest rate corridor and the tight liquidity policy have strengthened the
resilience of the Turkish economy against global shocks and have proven to be effective in pursuing
the primary objective of maintaining price stability. The wide interest rate corridor enables short-term
rates to temporarily exceed long-term rates when faced with shocks and allows the yield curve to be
kept nearly flat or inverted. Accordingly, TL long-term rates remain more stable and the economy
becomes less sensitive to global long-term interest rate shocks. Moreover, a flat or inverted yield curve
constitutes an effective monetary policy stance that supports disinflation. In fact, following the strong
monetary tightening of early 2014, the sensitivity of domestic markets to global interest rates weakened
markedly and core inflation indicators have improved significantly (Chart 1.1.7).
Chart 1.1.7
Regression Coefficients of 10-Year Treasury Bond Rates of Emerging
Economies on 10-Year US Treasury Bond Rates*
(Weekly Changes, 60-Day Moving Window,5-Day Moving Average)
Max-Min
Emerging Economies
4
Selected Emerging Economies
Turkey
3
4
3
2
1
1
0
0
-1
-1
-2
-2
-3
-3
1011
1211
0212
0412
0612
0812
1012
1212
0213
0413
0613
0813
1013
1213
0214
0414
0614
0814
1014
1214
0215
0415
0615
2
* Emerging economies include Brazil, Chile, Hungary, Poland, Peru, South Africa, Mexico, Malaysia,
Colombia, China, South Kore, India, Israel, Romania, Indonesia, Czech Republic, Thailand and
Philippines. Selected emerging economies are Brazil, South Africa, India and Indonesia.
Source: Bloomberg.
In addition to the interest rate corridor and the tight liquidity policy, the CBRT continues to make
efficient use of the policy tools it has developed in response to the global financial volatility. These
measures taken with regard to the financial system are highly important in encouraging prudential
borrowing and minimizing macrofinancial risks amid domestic and external uncertainty. The
remuneration of Turkish lira required reserves at different rates depending on core liabilities has been
effective as of January 2015. As of 8 May 2015, the remuneration rate has been raised by 50 basis
points. Similar to the FX sales, increasing the partial remuneration for required reserves reduces the
reserves maintained via the ROM, thus raising the system’s funding need from the CBRT. Moreover,
when the Turkish lira depreciates, reserves maintained via the ROM decrease automatically due to the
valuation effect, which helps to stabilize the FX liquidity. Additionally, the rise in FX required reserves
ratios to extend the maturity of non-core liabilities appears to have contributed to the recent slowdown
in the growth of the loan-to-deposit ratio (Chart 1.1.8). Furthermore, the share of short-term non-deposit
FX liabilities declined more evidently in the second quarter after the FX required reserves ratios were
changed to stimulate long-term borrowing (Chart 1.1.9).
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Inflation Report 2015-III
Central Bank of the Republic of Turkey
Chart 1.1.8.
Chart 1.1.9.
Loans/Deposits
Non-Deposit FX Liabilities by Maturity
(Percent)
(Percent)
Announcement of Required
Reserves Measures in the
Financial Stability Report
130
120
130
60
120
55
Announcement of Required
Reserves Measures in the
Financial Stability Report
60
55
<1-Year
110
110
50
100
100
45
50
45
>3-Year
90
40
80
80
35
35
70
70
30
30
40
0114
0214
0314
0414
0514
0614
0714
0814
0914
1014
1114
1214
0115
0215
0315
0415
0515
0615
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
0515
90
Source: CBRT.
In the second quarter, the CBRT continued with the flexible FX selling auctions where the amount
of FX to be sold is determined on a daily basis; and, as per the changes made to the ROC on 13
February 2015 and 10 March 2015, the CBRT supported the FX liquidity in the market by allowing
withdrawals from the FX reserves under ROM. Moreover, some new changes were made in addition to
the adjustments of the first quarter regarding the rates applied to banks’ FX borrowings from the CBRT.
Accordingly, the rates applied to banks’ one-week borrowings from the CBRT, which was 10 percent
before 9 October 2014, were lowered to 3 and 1.25 percent for USD and euro, respectively. Although
banks have not resorted to this facility yet, the adjustments made to the rates and upper limits of oneweek FX deposits serve as a buffer for the banking sector restoring the confidence in financial markets.
As another measure related to the FX liquidity, the USD-denominated required reserves, reserve
options and free reserves held at the CBRT have been remunerated as of 5 May 2015. The
remuneration rate to be applied is set on a daily basis by taking global and local financial market
conditions into account. In addition, the annual commission rate of 0.02 basis points that had been
applied since 1 February 2015 on euro-denominated accounts of banks and financing companies at
the CBRT was reduced to a yearly 0.005 basis points as of 1 July 2015, and to zero as of 27 July 2015 due
to the recent developments in the Euro area.
Thanks to the tight monetary policy stance and the macroprudential measures, loan growth
continues to stay at reasonable levels. Adjusted for exchange rate changes, loans provided to the
non-financial sector increased modestly by 18.1 percent year-on-year in the second quarter of 2015. A
comparison of consumer and commercial loans shows that commercial loans continue to grow at a
higher rate than consumer loans, partly due to BRSA regulations. The annualized growth rate of
commercial loans dropped to 15.1 percent at the end of the second quarter of 2015, whereas this rate
was 21.6 percent for commercial loans adjusted for exchange rate. Likewise, comparing their growth
trend to averages in past years, commercial loans are close to the average whereas consumer loans
are significantly below the average (Charts 1.1.10 and 1.1.11). Due to the moderate economic activity
and the recent tightening in financial conditions, loan growth is likely to slow somewhat in the
forthcoming period.
Inflation Report 2015-III
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Central Bank of the Republic of Turkey
Chart 1.1.10.
Chart 1.1.11.
Consumer Loan Growth
Commercial Loan Growth
(13-Week Moving Average, Annualized, Percent)
2007-2014 Average
2014
40
2015
(13-Week Moving Average, Annualized, Percent)
2007-2014 Average
2014
2015
25
25
25
20
20
20
20
15
15
15
15
10
10
10
10
5
5
5
5
0
0
0
Nov
Jun
May
Mar
Dec
Oct
Nov
Sep
Jul
Aug
Jun
Apr
May
Mar
Jan
Feb
Dec
25
0
40
Oct
30
Sep
35
30
Jul
35
30
Aug
35
30
Apr
35
Feb
40
Jan
40
Source: CBRT.
1.2. Macroeconomic Developments and Main Assumptions
Inflation
In the second quarter of 2015, annual consumer inflation declined by about 0.4 points from end
of the first quarter to 7.20 percent, nearing the forecasts of the April Inflation Report (Charts 1.2.1 and
1.2.2). This improvement in inflation was mainly attributed to the declining food inflation, while core
goods inflation increased mostly due to exchange rate developments. In this period, the contribution
of the food category to annual inflation was down to about 2.3 points amid the correction in food
prices. Yet, the depreciation of the Turkish lira limited the decline in inflation.
Chart 1.2.1.
Chart 1.2.2.
April Inflation Forecasts and Realizations*
April Inflation Forecasts and Realizations Excluding
Unprocessed Food and Tobacco* (Percent)
(Percent)
April 2015 Forecasts
April 2015 Forecasts
Inflation Realization
Inflation Realization
6
6
5
5
5
5
0615
6
0515
6
0415
7
0315
7
0215
7
0115
7
1214
8
0615
8
0515
8
0415
8
0315
9
0215
9
0115
9
1214
9
* Shaded region indicates 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 goods
inflation indicators). However, the lagged effects of the recent exchange rate developments delay the
improvement in the inflation outlook. In fact, compared to the first quarter, the underlying core inflation
indicators deteriorated notably in the second quarter, largely due to exchange-rate-driven cost
pressures (Chart 1.2.3). The cautious monetary policy stance and the moderate course of domestic
demand continued to limit the spillover from cost pressures into prices.
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Inflation Report 2015-III
Central Bank of the Republic of Turkey
Chart 1.2.3.
Chart 1.2.4.
Core Inflation Indicators
Food and Non-Food Prices
(Seasonally Adjusted, 3-Month Moving Average,
Annualized)
(Annual Percent Change)
SCA-I
Food and Catering Services
2
0615
4
2
0415
4
0215
6
1214
8
6
1014
0615
0415
0215
1214
1014
0814
0614
0414
0214
1213
1013
0813
3
0613
3
0413
5
0213
5
8
0814
7
10
0614
7
12
10
0414
9
14
12
0214
9
14
1213
11
1013
11
16
0813
13
18
CPI (excl. food and catering services)
16
0613
13
18
0413
15
0213
SCA-H
15
Source: TURKSTAT, CBRT.
As projected in the April Inflation Report, food prices were corrected remarkably amid the
weather conditions that accommodated supply in the second quarter. Annual inflation in the prices of
food, which makes up around 25 percent of the consumption basket, fell to 9.28 percent in June.
Similarly, annual inflation in food and catering services posted a significant decline in this period. Also,
consumer inflation excluding food and catering services increased by 1 point to 5.82 percent in the
inter-reporting period due to these cost pressures (Chart 1.2.4).
To sum up, food prices pulled inflation down in the second quarter; yet the depreciation of the
Turkish lira restricted this decline, inhibiting the desired improvement in the inflation outlook. Owing to
the expected partial recovery in food prices accompanied by the cautious monetary policy stance,
the deterioration in the inflation outlook is projected to remain limited and inflation is expected to
reach the target in the medium term.
Supply and Demand
According to the GDP data of the first quarter of 2015, economic activity proved more robust
compared to the outlook presented in the April Inflation Report, and the GDP rose by 1.3 and 2.3
percent on a quarterly and annual basis, respectively (Chart 1.2.5). An analysis of national income
components on the production side indicates that all sectors, excluding construction, exhibited
increases in the first quarter compared to the previous quarter’s averages. In this period, the
contributions of agriculture and net taxes stood out, while those of industry and services remained on a
mild uptrend (Chart 1.2.6). Seasonally adjusted data on the expenditures side reveal that final
domestic demand increased owing to the rise in consumption expenditures in the first quarter.
Investment expenditures contracted in both the public and the private sectors on a quarterly basis.
Meanwhile, exports posted an increase, but imports declined on a quarterly basis in the first quarter. On
the other hand, the import quantity index excluding gold posted a steady rise in line with the uptrend in
domestic demand in this period, while exports thereof declined amid the weak course of the external
demand.
Inflation Report 2015-III
7
Central Bank of the Republic of Turkey
Chart 1.2.6.
GDP and Final Domestic Demand
Contributions to Quarterly Growth from Production Side
(Seasonally Adjusted, Billion TL, 1998 Prices)
(Seasonally Adjusted, Percentage Points)
Net Taxes
Construction
5
Services
GDP
Final Domestic Demand
34
34
Millions
Chart 1.2.5.
Agriculture
Industry
GDP
5
4
4
30
3
3
28
28
2
2
26
26
1
1
24
24
0
0
22
-1
32
32
30
22
123412341234123412341234123412341
2007 2008 2009 2010 2011 2012 2013 20142015
-1
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2010
2011
2012
2013
2014 2015
Source: TURKSTAT.
Data on the second quarter of 2015 suggest that the economic activity continues to expand at
a moderate pace. Industrial production rose by 1.0 percent in the April-May period compared to the
previous quarter. Combined with the other indicators for June, the industrial production is expected to
record a quarterly increase in the second quarter. Sales, production, and import indicators regarding
domestic demand show that the final domestic demand will continue with an uptrend stemming from
consumption demand. Investment indicators, on the other hand, signal that the weak outlook will
remain in the second quarter. The export quantity index excluding gold increased at a modest rate in
the April-May period following the contraction in the first quarter, while imports excluding gold
maintained their upward trend suggesting that the contribution of external demand to economic
growth may be limited in the second quarter (Chart 1.2.7).
The recovery in economic activity is projected to continue in the upcoming period, yet risks to
growth exist. Downside risks regarding external demand persist due to geopolitical developments and
troubles in Europe. Moreover, domestic uncertainties, the weak course of the confidence indices, and
volatility in financial markets driven by global monetary policies stand out as potential risk factors that
could limit the contribution of final private demand to growth. Despite the existence of these factors
keeping the downside risks alive, the robust employment performance following the global crisis along
with low oil prices generate room for domestic demand and economic policies by improving the
current account balance and the inflation outlook. In addition, the expected correction in the
agricultural value added may support growth on the production side. Against this background, the
second half of 2015 is projected to witness a sustained moderate growth and disinflationary demand
conditions. In line with the favorable developments in the terms of trade coupled with the slowdown in
consumer loans, the current account balance is anticipated to recover further in the upcoming period;
yet the weak course of external demand may limit this recovery to some extent (Chart 1.2.8).
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Inflation Report 2015-III
Central Bank of the Republic of Turkey
Chart 1.2.7.
Chart 1.2.8.
Export and Import Quantity Indices
Current Account Balance
(Seasonally Adjusted, 2011Q1=100)
(12-Month Cumulative, Billion USD)
Current Account Balance
Current Account Balance (excl. gold)
Current Account Balance (excl. energy and gold)
Exports (excl. gold)
60
60
-50
-70
-70
-90
-90
0509
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 12*
-50
2007 2008 2009 2010 2011 2012 2013 2014 15
*As of May.
Source: TURKSTAT, CBRT.
0515
70
1114
80
70
-30
0514
80
-30
1113
90
-10
0513
90
-10
1112
100
10
0512
100
30
10
1111
110
0511
110
30
1110
120
0510
130
120
1109
Imports (excl. gold)
130
Source: CBRT.
Oil, Import and Food Prices
In the second quarter of 2015, oil prices stood slightly above the path projected in the previous
report, while USD-denominated import prices remained below projections (Charts 1.2.9 and 1.2.10). On
an annual basis, average oil price assumption was lowered by 2 percent for 2015, and by around 6
percent for 2016 (Table 7.1.1). Accordingly, assumptions for annual percentage changes in average
import prices were revised downwards by 1.7 points for 2015 and 1.4 points for 2016. Developments in
food prices show that unprocessed food prices exhibited a notable correction in the second quarter of
2015 and the contribution of food prices to inflation declined significantly. Due to the projections that
this correction will continue and the effects of measures taken by related institutions will materialize, the
food inflation assumption for end-2015 was revised downwards from 9 percent to 8 percent.
Chart 1.2.9. Revisions in Oil Prices*
Chart 1.2.10. Revisions in Import Prices*
(USD/bbl)
(USD, 2010=100)
July 2015
April 2015
July 2015
120
120
110
110
100
April 2015
115
115
110
110
105
105
100
100
95
95
100
Realization
90
90
80
80
70
70
60
60
50
50
90
90
Realization
1215
0915
0615
0315
1214
0914
0614
85
0314
85
1213
1215
0915
0615
0315
1214
0914
0614
0314
40
1213
40
* Shaded region denotes the forecast.
Source: TURKSTAT, Bloomberg, CBRT.
Fiscal Policy and Tax Adjustments
Medium-term projections are based on the assumption that tax adjustments and administered
prices will not exceed the inflation targets and be consistent with 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 policy will be implemented and the primary
expenditures to the GDP ratio will decrease gradually.
Inflation Report 2015-III
9
Central Bank of the Republic of Turkey
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 hover further around the recent
reasonable levels in 2015, also on the back of the macroprudential measures. Accordingly, inflation is
expected to be, with 70 percent probability, between 6.0 percent and 7.8 percent (with a mid-point of
6.9 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).
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
0618
0318
1217
0917
0617
0317
-4
1216
-4
0916
-2
0616
-2
0316
0
1215
0
0915
2
0615
2
0315
4
1214
4
0914
6
0614
6
* Shaded region denotes the 70 percent confidence interval for the forecast.
Source: CBRT.
In the second quarter of 2015, exchange rate movements delayed the recovery in the
underlying core inflation, causing the year-end inflation forecast to be raised by 0.5 points. On the
other hand, the improvement in import and food prices in the inter-reporting period reduced the yearend inflation forecast by 0.1 points and 0.3 points, respectively. As a result, import and food prices are
estimated to offset the adverse effects of core inflation indicators in the second half of the year.
Accordingly, the end-2015 inflation forecast, which was set as 6.8 percent in the April Inflation Report,
was revised upwards by 0.1 points. The end-2016 inflation forecast, which was 5.5 percent in the
previous Report, was kept unchanged. It is assessed that the downward revision in the average oil price
assumption will pull down the end-2016 inflation by around 0.1 points; yet this effect will be
compensated by the effect coming from the rise in inflation forecast for end-2015, leaving the end2016 inflation forecast intact (Chart 1.3.1).
Base effects will continue to determine the course of inflation for the rest of 2015. Accordingly,
inflation is envisaged to decline until September, and increase slightly in September due to base
effects. Then, following a fluctuating course, inflation is estimated to reach 6.9 percent in the year-end.
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Central Bank of the Republic of Turkey
1.4. Risks and the Monetary Policy
Loan growth remains reasonable in response to the tight monetary policy stance and
macroprudential measures. Commercial loans have recently been following a robust course of growth,
while growth of consumer loans excluding housing lost pace. Additionally, commercial loans grow
faster than consumer loans in line with the desired loan composition. Also owing to the recent partial
tightening in financial conditions, total credit growth is expected to slow somewhat in the second half
of the year. This loan outlook not only limits medium-term inflationary pressures, but also contributes to
the improvement in the current account balance.
External demand remains weak while domestic demand contributes to growth moderately.
Although the recovery in the European economy affects the external demand positively, ongoing
geopolitical developments and the slowdown in global trade restrict the growth of exports. Meanwhile,
cumulative energy imports will continue to decline if oil prices continue to remain low. As a result,
favorable developments in the terms of trade and the mild course of consumer loans support the
recovery in the current account balance, yet the relatively weak export outlook limits this recovery.
Domestic demand, on the other hand, exhibits a mild increase driven mainly by consumption.
Meanwhile, the weak course of confidence indices coupled with domestic and external uncertainties
are the risk factors that may restrict the contribution of the final private demand to growth. In this
context, it is projected that the rebound in economic activity will be gradual, and the aggregate
demand conditions will continue to support disinflation.
Unprocessed food inflation had been quite unfavorable in the first quarter, causing inflation to
remain elevated. However, recently, there has been a notable correction in food prices, which has
affected inflation favorably. Similarly, the current decline in oil prices supports disinflation. On the other
hand, exchange rate movements have been especially influential in the prices of core goods,
delaying the recovery in the core goods inflation. Together with the uncertainty in global markets and
volatility in energy and food prices, this warrants the cautious stance in monetary policy to be
maintained. It is assessed that the partial recovery in food prices accompanied by the cautious
monetary policy stance will limit the deterioration in the inflation outlook and inflation will reach the
target in the medium term.
Future monetary policy decisions will be conditional on the pace of improvements in the
inflation outlook. Inflation expectations, pricing behavior and other factors affecting 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.
Risks to global markets remain significant. 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, risk appetite and
capital flows continue to be volatile. It was underlined by the CBRT that structural measures to enhance
the resilience of the financial system are as important as the stabilizing cyclical policies. Accordingly,
recent measures implemented to support the FX liquidity, core liabilities, and long-term borrowing have
enhanced the resilience of the economy against global shocks. It is stated that additional measures
along these lines may be adopted if deemed necessary.
Inflation Report 2015-III
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Central Bank of the Republic of Turkey
Following the global crisis, long-term rates in emerging economies have grown excessively
sensitive to global monetary policy, the US monetary policy in particular. The wide interest rate corridor
and the tight liquidity policy implemented by the CBRT increased the resilience of the domestic
economy against global shocks during this period. In the upcoming period, volatility in long-term
interest rates may decline permanently by forward guidance during the normalization of global
monetary policies. According to this baseline scenario, the need for a wide interest rate corridor may
diminish over time. In that case, the operational framework of the CBRT’s interest rate policy may be
simplified gradually.
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
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 a fundamental element in reducing the sensitivity of the
Turkish economy against external shocks in recent years. In the current environment of highly uncertain
global markets, the value added from maintaining and further advancing these achievements is
significant. Any measure that would ensure the sustainability of the fiscal discipline and reduce the
savings deficit will support macroeconomic stability and contribute positively to social welfare by
keeping interest rates of long‐term government securities at low levels.
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Inflation Report 2015-III