Summary of the Monetary Policy Committee Meeting (2024-64)
No: 2024-64
November 28, 2024
Summary of the Monetary Policy Committee Meeting
Meeting Date: November 21, 2024
Global Economy
1. The limited improvement in the global growth outlook continued in the second quarter of the year while the normalization trend seen in the labor market supply-demand balance was maintained. The global growth index, which is weighted by the export shares of Türkiye’s foreign trade partners, is forecasted to grow by 2.0% in 2024. That is slightly higher than the 1.8% growth recorded in 2023, and global economic activity remains weak. The services sector continued to follow a favorable course while the manufacturing industry remained weak. The US economic growth trend continued to diverge positively from other advanced economies. The global demand outlook, supply-side factors and geopolitical risks lead commodity prices to fluctuate. Uncertainties regarding global economic and trade policies, as well as geopolitical risks are seen as prominent risk factors for the course of global economic activity.
2. Global inflation continues to decline. Rigidity in services inflation weakens, yet keeps the upside risks to inflation alive. As advanced and emerging economies (EMEs) continue the rate-cutting process, central banks are expected to adopt a cautious approach in rate cuts in a way to maintain the favorable trend in the inflation outlook. On the other hand, portfolio outflows from EMEs’ markets have recently been observed due to global uncertainties.
Monetary and Financial Conditions
3. With the help of macroprudential policies prioritizing Turkish lira (TRY) deposits, deposit rates remained almost unchanged compared to the week ending October 18, and stood at 56.0% as of November 15. In the same period, TRY commercial loan rates (excluding overdraft accounts and credit cards) decreased by 382 basis points to 52.7%. On the retail loans side, general-purpose loan rates (excluding overdraft accounts) declined by 70 basis points to 70.4% while housing loan rates decreased by 53 basis points to 40.9%. Vehicle loan rates, which follow a fluctuating course in general, were 40.7% as of November 15.
4. The average four-week growth rate of retail loans increased after October 18 from 2.0% to 2.3%. This increase was driven by the rise in the growth of general-purpose and housing loans. In the same period, TRY commercial loans fell from an average four-week growth rate of 2.3% to 1.1%. The average four-week growth rate of FX commercial loans adjusted for exchange rates remained unchanged at 1.5% over the previous MPC meeting period. Thus, commercial loan growth materialized below loan restrictions.
5. In light of the rising share of TRY deposits, the Central Bank of the Republic of Türkiye (CBRT) decided to take simplification steps to the macroprudential framework on November 22, 2024. In this regard, reserve requirement ratios for short-term TRY deposits were raised from 15% to 17% while the ratio for TRY-denominated required reserves that should be maintained for FX deposits was reduced from 5% to 4%. In addition, the TRY deposit share target for legal persons was abolished and the total target for KKM accounts’ transition to TRY and renewals was reduced from 75% to 70%.
6. The gross international reserves of the CBRT decreased by USD 2.68 billion since October 18 to USD 156.68 billion as of November 15, 2024. Türkiye's five-year credit default swap (CDS) premium stood at 260 basis points on November 20, 2024, posting a slight decline since October 16. The one-month implied exchange rate volatility of the Turkish lira rose to 12.97% as of November 20 while the 12-month implied exchange rate volatility dropped to 22.22%. Since the previous MPC meeting week, net portfolio inflows have totaled USD 2.35 billion, comprising USD 2.56 billion of inflows to the government domestic debt securities (GDDS) market, and USD 0.21 billion of outflows from the equity market.
Demand and Production
7. In September, the retail and trade sales volume indices increased on a monthly and quarterly basis. However, the quarterly increase in the retail sales volume is milder when gold is excluded. The services production index, which provides insight into both the production of services and their demand, decreased in the third quarter, continuing to decline on a quarterly basis. The course of automobile and white goods sales indicated a gradual slowdown in domestic demand in the third quarter. In October, card spending remained almost flat while the data for the first week of November imply a moderate fall. Survey data for manufacturing firms indicate that domestic market orders remain weak in the fourth quarter as in the third quarter. In this respect, indicators for the last quarter, such as high-frequency data and survey data, suggest that domestic demand continues to slow down, reaching disinflationary levels.
8. In September, the industrial production index increased by 1.6% month-on-month when adjusted for seasonal and calendar effects, and decreased by 2.4% year-on-year when adjusted for calendar effects. Thus, the monthly decline in industrial production in August was mostly offset in September. On a quarterly basis, industrial production fell by 1.3%. Excluding the typically volatile sectors, industrial production posted a limited fall in quarterly terms, but its underlying trend is assessed to have remained weak. Meanwhile, the manufacturing industry capacity utilization rate continues its quarterly decline in the last quarter.
9. In September, seasonally adjusted employment stood at 32.8 million people, growing by 0.4% on a quarterly basis. In this period, the labor force participation rate went up slightly quarter-on-quarter while the unemployment rate stood at 8.7%. Survey indicators suggest a weak outlook in manufacturing firms' future employment expectations.
10. In September, the current account balance posted a monthly surplus of USD 3 billion, whereas the 12-month cumulative current account deficit decreased to USD 9.7 billion due also to backward-looking upward revisions in travel revenues. The improvement in the cumulative current account balance in September was driven by the monthly falls in the energy trade deficit and gold trade deficit. On the other hand, the 12-month cumulative foreign trade deficit excluding gold and energy increased compared to the previous month. During this period, the 12-month cumulative services balance surplus remained robust and reached USD 59.9 billion.
11. In October, provisional foreign trade data pointed to a slight decline in exports and an increase in imports, in seasonally adjusted terms. The 12-month cumulative figures reveal that foreign trade balance improved compared to the previous month. Accordingly, the 12-month cumulative current account deficit is projected to narrow further in October with the ongoing strong contribution of travel revenues. Gold imports amounted to USD 1.7 billion in October, but dropped to USD 16.6 billion in cumulative terms. Seasonally adjusted imports of consumption goods declined in the third quarter compared to the previous quarter, but increased again in October. Excluding the jewelry imports, which has recently contributed significantly to the rise in consumption goods imports, the consumption goods imports appears to have a flatter outlook. When the provisional foreign trade data for October is considered along with the high-frequency leading data for November, the three-month average trends point to a sustained strength in exports and an increase in imports. These trends imply an increase in consumption goods imports in November.
12. Regarding the financing of the current account deficit, the banking sector’s 12-month cumulative long-term debt rollover ratio stood at around 140% in September. In the non-bank corporate sector, this ratio was around 112%. Accordingly, for the non-bank corporate sectors, external financing opportunities appear to have improved over the previous month.
Inflation Developments and Expectations
13. In October, consumer prices were up by 2.88% while annual inflation fell by 0.80 percentage points to 48.58%. Annual inflation in the B and C indices declined by 1.13 and 1.35 percentage points to 47.10% and 47.75%, respectively. In October, the contribution to annual inflation was down in services, energy, and alcohol-tobacco-gold groups while that of food and core goods groups went up.
14. While core goods inflation remains low, signs for an improvement in services inflation have become more apparent. In October, monthly price increases in the services group lost pace. This was led by the weakening rents and restaurants-hotels groups as well as by the other services group due in part to the end of the education-driven relative price adjustment. In October, the impact of food prices on consumer inflation stood out. Unprocessed food prices, which are sensitive to temporary supply conditions, posted a strong rise driven by fresh fruits and vegetables, thereby fueling this development. As a matter of fact, monthly food inflation excluding fresh fruits and vegetables remained lower at 1.29%. Energy prices followed a mild course in October.
15. The underlying trend of inflation registered a decline in October. In seasonally adjusted terms, monthly increases slowed in both B and C indices, being more pronounced in the latter, compared to the previous month. In this period, among the components of the B index, price increases lost pace in services and core goods but rose in processed food. When all indicators pertinent to underlying inflation in October were jointly analyzed, the three-month average increase receded to 2.4% from 2.6% in the previous month.
16. The prevalent price-setting behavior in the services sector leads to significant inertia and causes the impact of shocks on inflation to extend over a long time. The backward-indexation behavior in the services sector remains relatively strong. As of October, the seasonally-adjusted average price increase over the last three months was 1.6% in core goods while this rate has weakened compared to the previous month and materialized as 3.7% in services. Along with the mild course of some services items sensitive to demand, the decline in services items with time-dependent price setting led to a notable slowdown in monthly services inflation, which stood at 1.95% in October.
17. In October, monthly services inflation decelerated amid seasonal factors. In this period, the decline in the prices of transport services was mainly driven by air transport and intercity transport by road. Other services inflation weakened compared to the previous month, partly due to the completion of the education-driven effects. Monthly rent inflation eased in October due to falling contract renewal rates as well as the lower rate of rent increase in contracts. Monthly inflation in restaurants-hotels lost momentum as the mild course in catering services was accompanied by price decreases in the accommodation group.
18. Leading indicators tracked through micro data from the Retail Payment System (RPS) imply that rent increases will fall due in part to the decline in renewed contracts in November. On the other hand, rates of rent increases in new and renewed contracts obtained from RPS micro data and those monitored through residential property valuation reports are below the current annual inflation in the rent item of the consumer price index (CPI) and are decreasing. The fall in contract renewal rates in the last quarter of the year compared to the third quarter, coupled with the lower rate of rent increases used as a reference in contracts, indicates that monthly rent inflation will decelerate in December as well.
19. Domestic producer prices rose by 1.29% in October, and annual inflation dropped by 0.85 percentage points to 32.24%. Across the main industrial groupings, prices of durable consumption goods stood out with an increase of 2.82% in this period. Capital goods (0.67%) and energy (-0.56%) pulled headline producer inflation down. Pressures led by domestic producer prices weakened notably in the second half of the year, which favorably affected goods inflation.
20. As for international commodity prices, the rise in non-energy commodities in September spread across main groups in October. The monthly rise in the FAO food price index in September extended into October. Price increases in the oil subgroup were notable in the wake of production disruptions. Yet, in the first half of November, commodity prices declined across subgroups. Brent crude oil prices, which were USD 75.7 on average in October, remained volatile, due in part to geopolitical developments, and are approximately at USD 74.3 level in the first half of November.
21. The Global Supply Chain Pressure Index decreased and hovered slightly below its historical average in October. The downtrend in container indices for the globe and China, which was seen after July, continued in October as well, and the rise in dry cargo transport indices in September was replaced by a decline in this period. The basket exchange rate remained almost flat. The seasonally adjusted PMI data point to a slowdown in input and goods prices in the manufacturing industry in October.
22. According to the results of the Survey of Market Participants in November, inflation expectations displayed a partial rise. The 12-month-ahead inflation expectation decreased by 0.2 percentage points to 27.2% while inflation expectations for the end of the current year and the next year were revised upwards by 0.7 and 0.6 percentage points to 44.8% and 26.2%, respectively. The 24-month-ahead inflation expectation was up by 0.3 percentage points to 18.3%. Meanwhile, the five-year-ahead inflation expectation was measured at 11.1%, pointing to a 0.2 percentage point decrease. According to the expectations of the real sector, the 12-month-ahead annual inflation expectations of firms, which was 51.1% in September, declined by 1.6 percentage points to 49.5% in October. In the same period, the 12-month-ahead annual inflation expectations of households fell more significantly by 4.3 percentage points to 67.2%. While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process.
23. Leading indicators suggest that, similar to the previous month, the impact of food prices on consumer inflation will remain prominent in November. In contrast, monthly consumer inflation excluding food displays a more favorable track. Seasonally-adjusted monthly consumer inflation excluding food is on a gradual slowdown. Unprocessed food inflation remains elevated due to temporary supply conditions. This outlook is mainly driven by fresh fruits and vegetables prices According to leading indicators, core goods prices posted a limited increase in November while the relatively moderate price increases in the services group continued, as well.
Monetary Policy
24. The Committee decided to keep the policy rate (the one-week repo auction rate) constant at 50%.
25. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in the Turkish lira, and improvement in inflation expectations. Increased coordination of fiscal policy will also contribute significantly to this process. Consequently, the disinflation process will gain strength. The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. Accordingly, the level of the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account both realized and expected inflation. The Committee reiterated that it remains highly attentive to inflation risks. Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen.
26. In case of unanticipated developments in credit and deposit markets, monetary transmission mechanism will be supported via additional macroprudential measures. Liquidity conditions are assessed with respect to prospective developments and closely monitored. Sterilization tools will continue to be implemented effectively.
27. Taking into account the lagged effects of monetary tightening, the Committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5% inflation target in the medium term.
28. Indicators of inflation and underlying trend of inflation will be closely monitored, and the Committee will decisively use all the tools at its disposal in line with its main objective of price stability.
29. The Committee will make its decisions in a predictable, data-driven and transparent framework.