Summary of the Monetary Policy Committee Meeting (2025-01)
No: 2025-01
January 3, 2025
Summary of the Monetary Policy Committee Meeting
Meeting Date: December 26, 2024
Global Economy
1. The limited improvement in global growth continued in the third 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 1.9% in 2024, slightly higher than the 1.8% growth recorded in 2023. The growth rate is expected to be close to its historical average at 2.3% in 2025. 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 developments 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. While advanced and emerging economies (EMEs) continued the rate-cutting process, the US Federal Reserve's (Fed) communication of more limited easing for 2025 at its December meeting was noteworthy. The 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 EME equity markets have continued due to heightened global uncertainties.
Monetary and Financial Conditions
3. With the help of macroprudential policies prioritizing Turkish lira (TRY) deposits, deposit rates increased by 48 basis points compared to the week ending November 22, and stood at 56.5% as of December 20. In the same period, TRY commercial loan rates (excluding overdraft accounts and credit cards) decreased by 33 basis points to 55.2%. On the retail loans side, general-purpose loan rates (excluding overdraft accounts) declined by 146 basis points to 69.2% while housing loan rates decreased by 27 basis points to 41%. Vehicle loan rates were 36.1% as of December 20.
4. The average four-week growth rate of retail loans increased after November 22 from 2.3% to 3.5%. This increase was driven especially by the acceleration in credit card and general-purpose loans. In addition to the discount campaigns that intensified in the last month of the year, banks' usual tendency towards asset creation via loan expansion towards year-end was effective in the increase of personal credit card and consumer loans. In the same period, TRY commercial loans edged up from an average four-week growth rate of 1.1% to 1.4%. Thus, the growth rate of TRY commercial loans remained below the loan growth restrictions. The average four-week growth rate of FX commercial loans adjusted for exchange rates rose from 1.5% of the previous MPC meeting period to 2.3% on the back of loans exempted from FX loan growth restrictions.
5. The CBRT made revisions to the macroprudential framework on December 20, 2024 to support the decline in the FX-protected deposit (KKM) balance. Accordingly, the total target for KKM accounts’ transition to TRY and renewals was reduced from 70% to 60%, and the minimum interest rate applicable to KKM accounts was decreased from 70% to 50% of the policy rate. Additionally, the remuneration of reserve requirements maintained for KKM accounts was terminated for new KKM accounts or for those to be renewed.
6. The gross international reserves of the CBRT decreased by USD 0.4 billion since November 22 to USD 156.2 billion as of December 20, 2024. Türkiye's five-year credit default swap (CDS) premium stood at 259 basis points on December 24, 2024, posting a slight decline since November 20. The one-month implied exchange rate volatility of the Turkish lira fell to 11.7% as of December 24 while the 12-month implied exchange rate volatility dropped to 20.5%. Since the previous MPC meeting week, net portfolio outflows have totaled USD 0.2 billion. While almost all of this outflow stemmed from the Government Domestic Debt Securities (GDDS) market, the outflow from the stock market materialized at a very limited level.
Demand and Production
7. Gross domestic product (GDP) data pointed to a slight deceleration in economic activity in the third quarter. In this period, contribution of consumption to annual growth remained moderate, despite a quarter-on-quarter increase. Meanwhile, positive contribution of net exports to annual growth continued. Private consumption declined further on a quarterly basis while investments posted an increase in the third quarter following the previous quarter's decline. In this period, exports of goods and services rose on a quarterly basis while imports of goods and services decreased, with net exports contributing positively to quarterly growth. Therefore, expenditure composition of growth remained balanced.
8. In October, the retail sales volume index recorded a moderate monthly increase of 0.2% while the quarterly growth rate lost momentum, although it remains positive. Meanwhile, the retail sales volume edged down on a monthly basis when food is excluded. In the same period, the trade sales volume index declined on a monthly basis. The services production index, which provides insight into both the production of services and their demand, posted a limited increase of 0.2% in October. After recording a decline during the previous two quarters, the automobile and white goods sales have shown signs of improvement, with sales increasing in the last quarter. In October and November, the monthly increase in card spending was below the average of the previous quarter. The data for the first two weeks of December imply that this moderate course continues. Survey data for manufacturing firms indicate that domestic market orders increased in the fourth quarter, but remain below their historical average. Accordingly, indicators for the last quarter suggest that domestic demand, standing at disinflationary levels, continues to slow down.
9. In October, the industrial production index decreased by 0.9% month-on-month when adjusted for seasonal and calendar effects, and by 3.1% year-on-year when adjusted for calendar effects. On a quarterly basis, industrial production fell by 0.4% in the fourth quarter as of October, following a 4.1% and 1.3% decline in the second and third quarters, respectively. Excluding the typically volatile sectors, industrial production posted a limited increase in quarterly terms. Accordingly, the data as of October indicate a recovery trend in industrial production, albeit at a slower pace. In line with this trend, the manufacturing industry capacity utilization rate increased in November after a decline in October and remained flat in December.
10. In October, seasonally adjusted employment stood at 33.0 million people, growing by 0.7% on a quarterly basis. In this period, the labor force participation rate went up by 0.4 percentage points quarter-on-quarter while the unemployment rate stood at 8.8%. Survey indicators suggest a relatively weak outlook in manufacturing firms' future employment expectations, despite an improvement in the last quarter.
11. In October, the current account balance posted a monthly surplus of USD 1.9 billion while contributing to the reduction in the 12-month cumulative current account deficit to USD 7.7 billion. The improvement in the cumulative current account balance in October was driven by the decline in the foreign trade deficit excluding gold and energy. On the other hand, the 12-month cumulative energy trade deficit remained relatively flat while the gold trade deficit increased compared to the previous month. During this period, the 12-month cumulative services balance surplus remained robust and reached USD 60.1 billion.
12. In November, provisional foreign trade data pointed to a decline in exports and an increase in imports, in seasonally adjusted terms. The 12-month cumulative figures reveal that the foreign trade deficit rose compared to the previous month. Accordingly, the 12-month cumulative current account deficit is projected to widen in November. Gold imports amounted to USD 2.1 billion in November, and to USD 16.7 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 and November. Excluding the jewelry imports, which has recently contributed significantly to the rise in consumption goods imports, the consumption goods imports appear to have a flatter outlook. When the provisional foreign trade data for November is considered along with the high-frequency leading data for December, 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 December while suggesting a possible monthly decline when jewelry imports are excluded.
13. Regarding the financing of the current account deficit, the banking sector’s 12-month cumulative long-term debt rollover ratio stood at around 139% in October. In the non-bank corporate sector, this ratio was around 113%. Accordingly, for the non-bank corporate sectors, external financing opportunities appear to have improved over the previous month.
Inflation Developments and Expectations
14. In November, consumer prices were up by 2.24% while annual inflation fell by 1.49 percentage points to 47.09%. Annual inflation in the B and C indices declined by 1.42 and 0.62 percentage points to 45.68% and 47.13%, respectively. The contribution to annual inflation was down in energy, services, and alcohol-tobacco-gold groups, whereas the contribution of core goods remained unchanged and that of the food group increased. Accordingly, the impact of food prices on consumer inflation came to the fore in November while inflation excluding food was relatively more favorable. Meanwhile, a gradual slowdown is observed in the seasonally adjusted monthly consumer inflation excluding food.
15. While core goods inflation remained low, the monthly price increase in services was mild. In November, the services sector recorded the lowest monthly rate of increase in the last three years. The food group pushed monthly consumer inflation up in November with a strong price increase triggered by unprocessed food for the second consecutive month. 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 consumer inflation excluding food was lower at 1.34% in this period. Meanwhile, energy prices followed a mild course in November.
16. The underlying trend of inflation was essentially flat in November. In seasonally adjusted terms, monthly increases rose by a narrow margin in the B and C indices compared to the previous month. In this period, among the components of the B index, price increases lost pace in processed food, but remained almost flat in services and accelerated somewhat in core goods. Neither of the distribution-based and the model-based underlying inflation indicators, on the other hand, posted a noticeable change over the previous month.
17. As of November, the seasonally adjusted average price increase over the last three months was 1.7% in core goods while this rate has weakened compared to the previous month and materialized as 3.5% in services. Meanwhile, it remained below 3% in services excluding rent.
18. 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 period. Services prices saw a relatively modest increase of 1.61% in November after a long period of significant increases. Although the rent group posted a relatively high monthly increase, it has slowed down compared to the previous month, and monthly inflation in services excluding rents materialized at 0.90%. This can mainly be attributed to the relative price adjustment in items with time-dependent price setting coming virtually to end as well as the favorable outlook in services items that are relatively more demand-sensitive. This outlook was also driven by seasonal factors. Prices of transport services remained relatively flat (0.33%) in November on the back of reduced mobility. Monthly rent inflation eased in November due to falling contract renewal rates as well as the lower rate of rent increase in contracts. Monthly inflation in the restaurants-hotels subgroup weakened significantly by 0.79% as the monthly price increase in catering services slowed, and accommodation prices further declined. The mild increase in prices of other services (0.97%) in November pointed to a continued slowdown in this subgroup.
19. Leading indicators tracked through micro data from the Retail Payment System (RPS) imply that monthly rent inflation will ease in December. In addition to the falling contract renewal rate due to seasonal effects, the reference rate of rent increases in new and renewed contracts is also on a downtrend. 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.
20. Producer price increases weakened significantly. Domestic producer prices rose by 0.66% in November, and annual inflation dropped by 2.77 percentage points to 29.47%, maintaining its downward trend. In this period, capital and intermediate goods and energy curbed headline producer inflation while food production and medicine prices were the main drivers of the price increases in non-durable consumption goods.
21. International commodity prices fell in November, led by the energy sector. The monthly rise in the FAO food prices index in September extended into November, albeit at a slower pace. Price increases in the oil subgroup were notable in the wake of production disruptions. Commodity prices remained relatively flat in the first half of December. Across subgroups, commodity prices receded in energy but rose in agriculture. Brent crude oil prices, which were USD 74.4 on average in November, remained volatile, due in part to geopolitical developments, and are approximately at USD 74.0 in the first half of December.
22. The Global Supply Chain Pressure Index remained almost flat and hovered slightly below its historical average in November. The downtrend in container indices for the globe and China, which was seen after July, was replaced by a rise in November while the downtrend in dry cargo transport indices, which started after October, continued. The basket exchange rate displayed a limited decrease in November. In this period, the seasonally adjusted PMI data point to a slowdown in input and goods prices in the manufacturing industry.
23. According to the results of the Survey of Market Participants in December, inflation expectations displayed a partial rise. The 12-month-ahead inflation expectation decreased by 0.1 percentage points to 27.1% while inflation expectations for the end of the current year and the next year were revised upwards by 0.5 and 0.9 percentage points to 45.3% and 27.1%, respectively. The 24-month-ahead inflation expectation was up by 0.1 percentage points to 18.5%. Meanwhile, the five-year-ahead inflation expectation was measured at 11.3%. According to the expectations of the real sector, the 12-month-ahead annual inflation expectations of firms, which was 47.8% in November, declined by 0.2 percentage points to 47.6% in December. In the same period, the 12-month-ahead annual inflation expectations of households fell by 1.0 percentage points to 63.1%. While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process.
24. Leading indicators point to weakening consumer inflation in December. While core goods inflation remains low, the improvement in services inflation has become more apparent. The monthly price increases have been decelerating both in rent and service prices excluding rent. Unprocessed food inflation appears to have moderated in December after an elevated course in the previous two months. Leading indicators suggest that supply-side pressures on fresh fruit and vegetable prices faded in December. Against this backdrop, leading indicators point to a decline in the underlying trend in December.
Monetary Policy
25. The Committee has decided to reduce the policy rate (the one-week repo auction rate) from 50 percent to 47.5 percent. The Committee has also decided to adjust the monetary policy operational framework by setting the Central Bank overnight borrowing and lending rates 150 basis points below and above the one-week repo auction rate, respectively.
26. The decisiveness regarding tight monetary stance is bringing down the underlying trend of monthly inflation and strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Going forward, increased coordination of fiscal policy will also contribute significantly to this process. 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 will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook. Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen.
27. In case of unanticipated developments in credit and deposit markets, monetary transmission mechanism will be supported via additional macroprudential measures. Liquidity conditions are closely monitored and assessed with respect to prospective developments. Sterilization tools will continue to be implemented effectively.
28. 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.
29. 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.
30. The Committee will make its decisions in a predictable, data-driven and transparent framework.