Summary of the Monetary Policy Committee Meeting (2024-47)
No: 2024-47
August 27, 2024
Summary of the Monetary Policy Committee Meeting
Meeting Date: August 20, 2024
Global Economy
1. The limited improvement in the global growth outlook continued in the second quarter of the year, while tightness in labor markets began to ease and the normalization trend seen in the supply-demand balance continued. 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 first quarter growth data for advanced economies is supportive of the moderate recovery in economic activity, while leading indicators suggest that this recovery is mostly driven by the services sector. The US economic growth trend continued to diverge positively from other advanced economies. The cautious pace of interest rate cuts to ensure a permanent decline in inflation and geopolitical risks are seen as prominent risk factors for the course of global economic activity in 2024.
2. Global inflation continues to decline, and the latest inflation data from the US indicate that price rigidity in the services sector has begun to weaken. While emerging economies (EMEs) continue to cut interest rates in a way to maintain monetary tightness, an additional number of central banks of advanced economies began to cut rates. Even though the ongoing improvement in the inflation outlook and the recent developments regarding services inflation strengthen expectations for rate cuts, central banks of advanced economies are expected to adopt a cautious approach in rate-cuts. On the other hand, risk appetite weakened and portfolio outflows from EMEs’ equity markets were observed due to global uncertainties and the volatility in financial markets in August.
Monetary and Financial Conditions
3. The fall in inflation and exchange rate expectations as well as temporal excess liquidity in the market, driven by residents' and non-residents' preference for Turkish lira assets, continues to play a determining role in deposit interest rates. Turkish lira deposit rates have declined by 55 basis points since the week ending July 26 and stood at 55.20% as of August 9. In the same period, Turkish lira commercial loan rates (excluding overdraft accounts and credit cards) decreased by 67 basis points to 58.57%. On the retail loans side, general-purpose loan rates (excluding overdraft accounts) increased by 26 basis points to 74.59%, while housing loan rates remained flat at 43.48%. Vehicle loan interest rates, which have followed a fluctuating course in the recent period due to sales campaigns, were 55.06% as of August 9.
4. The average four-week growth rate of retail loans has increased since the week ending July 26 from 1.68% to 2.27% as of August 9. This increase was driven by the rise in the growth rate of personal credit card balances. In the same period, Turkish lira commercial loans remained on a mild growth path, at an average four-week growth rate of 0.21%. The average four-week growth rate of FX commercial loans adjusted for exchange rates stood at 1.95% due to the growth restrictions, despite having continued to be stronger than Turkish lira commercial loan growth.
5. Policy measures taken to accelerate the unwinding process of FX-protected deposit accounts (KKM) have led to a rapid decline in these accounts and accordingly, the demand for Turkish lira deposits continues. On the other hand, FX deposits posted a limited increase amid the fall in KKM renewals.
6. Excess liquidity is sterilized using reserve requirements and the toolset that was expanded in the last MPC meeting period. Accordingly, the Central Bank of the Republic of Türkiye (CBRT) began holding additional Turkish lira deposit buying auctions on the days and times deemed necessary. Moreover, FX swap auctions against the Turkish lira were conducted on August 2 and 13. Finally, the CBRT started to enter quotations in the Takasbank money market in order to conduct overnight borrowing transactions with banks and non-bank financial institutions via quotation in other money markets.
7. The gross international reserves of the CBRT increased by USD 2.22 billion compared to the previous MPC meeting week to USD 150.23 billion as of August 9, 2024. Türkiye's five-year credit default swap (CDS) premium stood at 266 basis points on August 19, 2024, posting a slight rise due also to the volatility in global financial markets during the latest MPC meeting period. The one-month implied exchange rate volatility of the Turkish lira declined to 10.60%, and the 12-month implied exchange rate volatility fell to 22.0% as of August 19. Since the previous MPC meeting week, net portfolio inflows have totaled USD 0.60 billion, comprising USD 1.22 billion of inflows to the government domestic debt securities (GDDS) market, and USD 0.62 billion of outflows from equity markets.
Demand and Production
8. Indicators for the third quarter suggest that domestic demand continues to slow down with a diminishing inflationary impact. In June, the retail sales volume index increased monthly, but posted a slight decrease on a quarterly basis. During the same period, the trade sales volume index posted a sharper decline quarter-on-quarter. Trade of motor vehicles and wholesale trade, the other two main components of the index along with retail trade, also decreased. Services production index, which had recorded a moderate increase in the first quarter, declined somewhat in the second quarter. Available data for the third quarter suggest continuation of the slowdown in domestic demand. In July, card spending posted a limited monthly decline, while flattening in quarterly terms. Meanwhile, seasonally adjusted imports of consumption goods declined further and converged to their previous year averages. In July, survey data for manufacturing firms indicate a quarterly decline in domestic market orders. Information on consumption expenditures from interviews with firms confirm the slowdown in domestic demand.
9. In June, the industrial production index decreased by 2.1% month-on-month when adjusted for seasonal and calendar effects, and declined by 4.7% year-on-year when adjusted for calendar effects. On a quarterly basis, industrial production fell by 3.9%. The sector-wide decline in production is attributed to the bridge days in June, associated with the administrative extension of the religious holiday. Excluding this effect, the underlying trend of industrial production in June is estimated to have been stronger than the overall index suggested. Available data for the second quarter suggest that the annual and quarterly growth rates of gross domestic product will decline compared to the first quarter. However, excluding the temporary weakening due to the bridge days, it is assessed that the decline has been milder and the underlying trend of economic activity has been more moderate in the second quarter. Leading indicators point to a slight decline in the manufacturing industry capacity utilization rate in August.
10. As of June, seasonally adjusted employment rose by 0.6% on a quarterly basis and stood at 32.7 million people. In this period, the labor force participation rate went up by 0.3 percentage points, while the unemployment rate remained flat at 8.8% in quarterly terms. Survey indicators, indicate a decline in manufacturing firms' future employment expectations.
11. In June, the current account balance ran a monthly surplus of USD 407 million, whereas the annualized current account deficit widened by USD 0.4 billion to USD 24.8 billion. The widening was mostly driven by the rise in the foreign trade deficit excluding gold and energy. On the other hand, the energy trade deficit remained relatively flat, and the gold trade deficit narrowed compared to the previous month. During this period, the annualized services balance surplus recorded a month-on-month increase.
12. In July, provisional foreign trade data pointed to a decrease in imports and flattening in exports, in seasonally adjusted terms. Accordingly, on an annualized basis, the improvement in the current account balance, which came to a standstill in June, is projected to resume in July, bolstered by travel revenues. Gold imports fell below their historical averages in July, dropping to around USD 19.5 billion in annualized terms. Despite successive decreases in June and July, consumption goods imports remain elevated in seasonally adjusted terms. When the provisional foreign trade data for July is considered along with the high frequency data for August, the three-month average trends imply a moderate fall in exports and a rise in imports. The trend in imports of consumption goods is closely monitored, in tandem with a number of other indicators, to assess the impact of the monetary tightening on domestic demand.
13. Regarding the financing of the current account deficit, the banking sector’s annualized long-term debt rollover ratio stood around 141% in June. In the non-bank corporate sector, this ratio was around 101%. Accordingly, external financing opportunities appear to have improved somewhat over the previous month.
Inflation Developments and Expectations
14. In July, consumer prices were up 3.23%, while annual inflation fell by 9.82 percentage points to 61.78% due also to the base effect. Annual changes in the core indicators B and C declined to 60.31% and 60.23%, respectively. In this period, the contribution to inflation of all groups dropped, led by core goods. Adjusted for seasonal effects, monthly consumer inflation increased compared to the previous month. This was mainly driven by revised lump sum taxes and higher administered prices, as well as fresh fruit and vegetable prices, which increased contrary to seasonal averages.
15. In July, inflation in the energy group was notable due to the rise in residential electricity tariffs and the automatic tax arrangements in fuel and bottled gas. Monthly price increases in the services group followed a high course in this period as well. In this group, price increases strengthened across subgroups with rents, communication and transport in the lead. The price increase in core goods remained limited due to the durable goods subgroup (excluding gold), which posted a mild course amid the exchange rate and domestic demand developments. Having remained subdued in the last couple of months in particular, clothing inflation also supported this outlook. Meanwhile, the monthly price increase in the food group stood close that in the previous month. In the unprocessed food subgroup, prices of poultry meat declined further, while red meat prices remained relatively flat. Prices of fresh fruits and vegetables increased in contrary to seasonal averages due also to hot weather, limiting a more favorable outlook in the food group. In the processed food subgroup, monthly inflation edged down compared to the previous month, while the bread and cereals item stood out with the price increase.
16. The underlying trend of monthly inflation rose slightly in July but remained below its second-quarter average. The seasonally adjusted three-month average increases in the B and C indices were measured at 2.6% and 2.5%, respectively, and receded further. In July, processed food, which is among the groups making up the B index, recorded a slight deceleration, whereas other groups posted increases. The Median, SATRIM, the diffusion index and other underlying trend indicators also posted a month-on-month uptick.
17. While goods inflation is declining, improvement in services inflation is expected to lag. The high level of and the stickiness in services inflation, inflation expectations, and geopolitical developments keep inflationary risks alive.
18. Core goods inflation has receded to low levels. Meanwhile, services inflation exhibits strong backward-indexation. This 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. In July, annual inflation was recorded at 38.25% in core goods, and it was around 47 percentage points higher in services at 85.63%. Moreover, the diffusion index for the services sector indicated that increases continued to spread across the sector.
19. In tandem with the higher rate of contract renewals in July, rent inflation maintained its high course. Leading indicators tracked through micro data from the Retail Payment System (RPS) imply that monthly rent inflation will remain high due to the noteworthy level of renewed contracts in August. On the other hand, both the rate of rent increases in new and renewed contracts and rental rates monitored through residential property valuation reports are below the current annual level in the rent item in the consumer price index (CPI). This implies that annual rent inflation in the CPI will lose pace in the period ahead. However, the high inertia in this item is considered to cause rent inflation to remain high and continue to shape the course of consumer inflation in the disinflation period, albeit at a declining rate.
20. Prices in transport services recorded an uptick in July following the rise in fuel prices, which was mainly driven by tariffs for urban passenger transport and intercity passenger transport by road. The price increases in communication services were largely due to mobile phone and internet fees. Monthly inflation in the restaurants-hotels subgroup edged up month-on-month, led by catering services, while hotel prices were on the rise as well. Health services saw price hikes following the revisions to the tariffs of the Turkish Medical Association.
21. Domestic producer prices rose by 1.94% in July, and annual inflation dropped by 8.72 percentage points to 41.37% due to the high base effect. According to the Main Industrial Groupings (MIGs), energy prices stood out with a monthly increase of 6.28%, while price increases in other groups, particularly in durable and non-durable consumption goods, remained moderate.
22. Having started in late April, the fall in international commodity prices continued in July. Across subgroups, global energy prices edged up, while non-energy commodity prices declined significantly. In the first three weeks of August, commodity prices were on the decline, led by crude oil prices. Both global energy prices and non-energy commodity prices fell in this period. Brent crude oil prices, which averaged USD 85.3 in July, dropped to USD 80.9 approximately in the first three weeks of August.
23. The Global Supply Chain Pressure Index hovered close to its historical average in July. Container indices for the globe and China posted an increase after April, while dry cargo transport indices have been on a relatively mild track. Exchange rate-driven pressures eased significantly due to the ongoing mild course of the basket exchange rate. Meanwhile, in July, the seasonally-adjusted manufacturing industry PMI data increased both in input and final product price indices and returned to the May levels.
24. According to the results of the Survey of Market Participants in August, inflation expectations for the current year-end and the end of the next year edged up by 0.3 and 0.2 percentage points to 43.3% and 25.6%, respectively. The 12-month-ahead inflation expectation was revised down by 1.3 percentage points from 30.0% to 28.7%, while the 24-month-ahead inflation expectation was unchanged at 19.3%. Meanwhile, the five-year-ahead inflation expectation was measured at 11.7%. The current levels of inflation expectations continue to pose an upside risk to the inflation outlook. According to the expectations of the real sector, the 12-month-ahead inflation expectations of firms declined from 56.2% in June to 55.0% in July, showing a limited improvement. On the other hand, in the same period, the 12-month-ahead inflation expectations of households appear to have increased slightly from 71.49% to 71.98%. The Committee emphasized that the alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process.
25. Leading indicators suggest that monthly inflation will slow down in August compared to the previous month, led by the low course of food prices. The favorable course in food prices is driven by the unprocessed food group, which registers a decline led by fresh fruit and vegetable prices. In this period, as the three-month average increases in core indicators B and C remain flat, the underlying trend of inflation is not expected to display a significant change. Despite the fall in fuel prices, monthly energy inflation will remain high due to the adjustment in natural gas tariffs for households. Leading indicators suggest that thanks to the recent mild course of exchange rates and domestic demand developments, price increases in core goods remain below those of other groups. The favorable outlook in durable goods continues. Nevertheless, price increases in the services group remain strong. In addition to rents, administered transport services and education stand out. University tuition fees, particularly private universities, have increased significantly, and this year, university tuition fees have been reflected on the index earlier because of the admission period. Accordingly, it should be noted that the impact of price adjustments linked to university tuition fees will be observed on monthly services inflation and thus on core indicators in the next two months.
Monetary Policy
26. Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks.
27. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. 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. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.
28. 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.
29. 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 percent inflation target in the medium term.
30. 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.
31. The Committee will make its decisions in a predictable, data-driven, and transparent framework.