the economic outlook and monetary policy - TCMB

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Aug 19, 2015 - Exports and imports continue to decline in USD terms, reflecting the .... /14. 10. /14. 12. /14. 02. /15.
THE ECONOMIC OUTLOOK AND MONETARY POLICY

August 19, 2015

Overview: Macroeconomic Outlook and Monetary Policy 

Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. External demand remains weak, while domestic demand contributes to growth moderately.



Processed food and energy price developments affect inflation favorably in the short run, while exchange rate movements delay the improvement in the core indicators. Considering this delay and taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the Committee decided to implement a tighter liquidity policy as long as deemed necessary.



The Committee also discussed the roadmap to be implemented before and after global monetary policy normalization and decided to publish a strategy document with today’s policy statement.



Future monetary policy decisions will be conditional on the improvements in the inflation outlook. 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. 2

Outline

Economic Activity 2. External Balance 3. Inflation 4. Monetary and Financial Conditions 5. The Road Map 1.

3

ECONOMIC ACTIVITY

4

GDP continues to grow at a moderate pace, …. Contribution to Annual GDP Growth (Percentage Points) 20

Change in Inventories Net Exports Final Domestic Demand GDP

15

10

5

0

-5

Source: TURKSTAT.

03/15

12/14

09/14

06/14

03/14

12/13

09/13

06/13

03/13

12/12

09/12

06/12

03/12

12/11

09/11

06/11

03/11

12/10

09/10

06/10

03/10

-10

Last Observation: 2015 Q1

5

…driven mainly by consumption expenditures. Private Consumption Expenditures

Private Investment

(Seasonally Adjusted, 2011 Q1=100)

(Seasonally Adjusted, 2011 Q1=100) 105

115

100 110

95

105

90

85 100

80 75

95

70 90

65 60

85

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 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

2010

2015

2011

2012

2013

2014

2015

Public Consumption Expenditures

Public Investment

(Seasonally Adjusted, 2011 Q1=100)

(Seasonally Adjusted, 2013 Q1=100) 105

130

100

125

95

120

90

115

85

110 105

80

100

75

95

70

90

65 60

85 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

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

6

Industrial production continues to expand with the contribution from domestic orders, while exports stay relatively weak. Manufacturing Orders

Industrial Production and Capacity Utilization (Seasonally Adjusted) 130

(Seasonally Adjusted) 78

77

20

Exports 15

Domestic

125 76 10 75

120

74 115

73

0

72

Industrial Production

110

5

-5

Capacity Utilization (rhs)

71

Source: TURKSTAT, CBRT.

Last Observation: June 2015 for Industrial Production, July 2015 for Capacity Utilization.

Source: CBRT Business Tendency Survey.

07/15

04/15

01/15

10/14

07/14

04/14

01/14

10/13

07/13

04/13

01/13

10/12

07/12

04/12

-10

01/12

04/15

01/15

10/14

07/14

04/14

01/14

10/13

07/13

04/13

01/13

10/12

07/12

04/12

70

01/12

105

Last Observation: July 2015.

7

Consumer confidence and investment tendency point to a moderate private domestic demand. Investment and Employment Prospects

Consumer Confidence CNBC-e

(Seasonally Adjusted) Investment Tendency

TURKSTAT-CBRT (rhs)

110

90

Employment Tendency

25

85 100

20 80

90 75 80

15

70 65

10

70 60 5

60 55

Source: CNBC-e, TURKSTAT, CBRT.

Last Observation: July 2015 for CNBC-e Survey, July 2015 for TURKSTAT-CBRT Survey.

Source: CBRT Business Tendency Survey

07/15

04/15

01/15

10/14

07/14

04/14

01/14

10/13

07/13

04/13

01/13

10/12

07/12

04/12

0

01/12

05/15

01/15

09/14

05/14

01/14

09/13

05/13

01/13

09/12

05/12

50

01/12

50

Last Observation: July 2015.

8

52

27

Participation Rate (%) Employment (millions, right axis)

26

Thousands

Employment have continued to increase.

15

Unemployment Rate (percent) Non-farm Unemployment Rate (percent)

50 25

13

24

48

23 46

11

22

21

9

44 20

Source: TURKSTAT, Household Labor Force Survey, CBRT.

Last Observation: May 2015.

9

05/15

01/15

09/14

05/14

01/14

09/13

05/13

01/13

09/12

05/12

01/12

09/11

05/11

01/11

09/10

7

05/10

05/15

01/15

09/14

05/14

01/14

09/13

05/13

01/13

09/12

05/12

01/12

09/11

05/11

01/11

09/10

19

05/10

42

EXTERNAL BALANCE

10

Exports and imports continue to decline in USD terms, reflecting the movements in USD/Euro exchange rate, slowdown in global demand… Exports and Imports (Nominal y-o-y percentage change, 6-month MA) 20

Exports (excluding gold)

Imports (excluding gold)

15 10 5 0 -5 -10

Source: TURKSTAT.

05/15

03/15

01/15

11/14

09/14

07/14

05/14

03/14

01/14

11/13

09/13

07/13

05/13

03/13

01/13

11/12

09/12

07/12

05/12

03/12

01/12

-15

Last Observation: June 2015.

11

… and geopolitical developments,… Exports to Russia

Exports to Iraq

(Monthly, Million USD)

(Monthly, Million USD)

800

1400

700

1200

600

1000

500

800

400 600

300

Source: TURKSTAT

0115

0714

0114

0713

0113

0712

0112

0711

0111

0710

0110

0709

0415

1114

0614

0114

0813

0313

1012

0512

1211

0711

0211

0910

0410

0

1109

0

0609

200

0109

100

0109

400

200

Last Observation: June 2015.

12

…while exports to the EU continue to grow in Euro terms. Exports to European Union (12 months cumulative, billion Euros)

55

50

45

40

35

Source: TURKSTAT.

0115

0714

0114

0713

0113

0712

0112

0711

0111

0710

0110

0709

0109

0708

0108

0707

0107

30

Last Observation: June 2015.

13

Recently exports showed some recovery in real terms.. 135 130 125 120

115 110 105 100

export (excluding gold)

95

import (excluding gold)

90 1

2

3

2010

Source: CBRT.

4

1

2

3

2011

4

1

2

3

2012

4

1

2

3

2013

4

1

2

3

2014

4

1

2

2015

Last Observation: 2015 Q2.

14

The favorable impact of lower oil prices on the current account balance will be more pronounced in the forthcoming period. Energy Imports (12-Month Cumulative, Billion USD) 65 60 55 50 45 40 35

Source: TURKSTAT

0415

0115

1014

0714

0414

0114

1013

0713

0413

0113

1012

0712

0412

0112

1011

0711

0411

0111

1010

0710

0410

0110

30

Last Observation: June 2015.

15

Current account balance has improved markedly since 2011 and further improvement is expected in the forthcoming period. Current Account Balance (CAB) (12-Month Cumulative, Billion USD) -30 -35

CAD

-40

CAD (Excluding gold) -45 -50 -55 -60

-65 -70

Source: CBRT.

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

06/12

04/12

02/12

12/11

10/11

08/11

06/11

04/11

02/11

12/10

-80

10/10

-75

Last Observation: June 2015.

16

Current account deficit is largely financed through long term borrowing and FDI. (12-Months Cumulative, Billion USD) Portfolio and Short Term**

FDI and Long Term*

CAD

85 75 65 55 45 35

25 15 5

Source: CBRT.

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

06/12

04/12

02/12

12/11

10/11

08/11

06/11

04/11

02/11

12/10

10/10

-5

*Long term inflows are sum of banking and real sectors’ long term net credit and bonds issued by banks and the Treasury. Short term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. Last Observation: June 2015.

17

INFLATION

18

Food and energy price developments help disinflation in the short run… (Annual Percentage Change) 13 12

CPI

H

I

11 10 9 8 7 6 5 4

Source: TURKSTAT.

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

06/12

04/12

02/12

12/11

10/11

08/11

3

Last Observation: July 2015.

19

… while exchange rate movements delay the improvement in the core indicators. Core Inflation Indicators H and I (Seasonally adjusted, Annualized 3-Month-Average, Percent) 16

H

I

14 12 10 8 6 4 2

02/1 1 05/1 1 08/1 1 11/1 1 02/1 2 05/1 2 08/1 2 11/1 2 02/1 3 05/1 3 08/1 3 11/1 3 02/1 4 05/1 4 08/1 4 11/1 4 02/1 5 05/1 5

0

Source: TURKSTAT, CBRT.

Last Observation: July 2015.

20

The decline in import prices limits the pass-through from exchange rates to domestic inflation. Import Price Index (2010=100) 260 240 220

Import Prices (TL) 200 180 160 140 Import Prices (USD)

120 100 80 60 0110 Source: TURKSTAT, CBRT.

0810

0311

1011

0512

1212

0713

0214

0914

0415

Last Observation: June 2015.

21

Inflation expectations are still above the desired levels. Inflation Expectations

8,5

(Percent) 8,0

7,5 12 months 7,0

6,5

24 months

6,0

5,5

Source: CBRT.

08/15

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

06/12

04/12

02/12

12/11

10/11

08/11

5,0

Last Observation: August 2015.

22

Monetary and Financial Conditions

23

Portfolio flows to emerging countries have been volatile ... Equity and Bond Flows to Emerging Markets (Billion USD, 4-Week Moving Sum) 35 30

Bonds

Equities

25 20 15 10 5 0 -5 -10 -15 -20 -25 -30

Source: EPFR.

07/15

05/15

03/15

01/15

11/14

09/14

07/14

05/14

03/14

01/14

11/13

09/13

07/13

05/13

03/13

01/13

11/12

09/12

07/12

05/12

03/12

01/12

-35

Last Observation: August 12, 2015.

24

… as well as the risk premium indicators ... Regional EMBI Indices (Basis Points) 700

700

EMBI Europe

EMBI Turkey

EMBI Latin America

EMBI Asia

600

600

500

500

400

400

300

300

200

200

100

100

Source: Bloomberg.

Last Observation: August 14, 2015.

25

… and the exchange rates. Implied FX volatility (1 month, Percent) 35

35

30

30

Turkey

Emerging Economies*

25

25

Source: Bloomberg

08/15

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

0

06/12

0

04/12

5

02/12

5

12/11

10

10/11

10

08/11

15

06/11

15

04/11

20

02/11

20

*Emerging market currencies include Brazil, Chile, Colombia, Mexico, Poland, Czech Republic, South Africa, Indonesia, Romania against USD. Last Observation August 14, 2015.

26

The liquidity policy has been tight and will be further tightened as long as deemed necessary. Interest Rates (Percent) 13

Interest Rate Corridor

CBRT Average Fund Rate

BIST Interbank Market O/N Rates

One-Week Repo Rate

13

Source: CBRT

08/15

07/15

06/15

05/15

04/15

03/15

02/15

01/15

12/14

3

11/14

3

10/14

4

09/14

4

08/14

5

07/14

5

06/14

6

05/14

6

04/14

7

03/14

7

02/14

8

01/14

8

12/13

9

11/13

9

10/13

10

09/13

10

08/13

11

07/13

11

06/13

12

05/13

12

Last Observation: August 14, 2015.

27

Yield curve has been inverted due to tight liquidity policy. Interest Rates (Percent) 5-Year Market Rate

12

3-Month Market Rate

12

10

10

8

8

6

6

4

4 5 year-3 month spread

Source: CBRT.

08/15

06/15

04/15

02/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

04/13

02/13

12/12

10/12

08/12

06/12

04/12

02/12

-2 12/11

-2 10/11

0

08/11

0

06/11

2

04/11

2

Last Observation: August 14, 2015.

28

Bank lending rates reflect the cautious macroprudential and monetary policies. Interest Rates on Consumer Loans (Percent) 21

19

17 Other 15 Automobile 13

Housing 11

9

Source: CBRT.

07/15

04/15

01/15

10/14

07/14

04/14

01/14

10/13

07/13

04/13

01/13

10/12

07/12

04/12

01/12

10/11

07/11

04/11

01/11

10/10

07/10

04/10

01/10

7

Last Observation: July 31, 2015.

29

Loan volumes continue to expand at a reasonable pace due to cautious monetary policy stance and macroprudential measures. Total Loan Growth Rate (Year on Year Change, Percent) 40

35

30

25

20

15

Source: CBRT.

07/15

05/15

03/15

01/15

11/14

09/14

07/14

05/14

03/14

01/14

11/13

09/13

07/13

05/13

03/13

01/13

11/12

09/12

07/12

05/12

03/12

01/12

11/11

09/11

07/11

05/11

03/11

01/11

10

Last Observation: August 07, 2015. Total loan is inclusive of all types of banks (deposit banks, participation banks, and development/investment banks) and credit cards. Adjusted for exchange rate.

30

Commercial loans grow at a faster pace than consumer loans, contributing to price stability, financial stability, and the rebalancing process.

Loan Growth Rates

50

50

(Annual Percentage Change)

45

45

40

40

35

35

30

30

Commercial

25

25

20

20

15

15

Consumer

10

10

Source: CBRT.

0715

0515

0315

0115

1114

0914

0714

0514

0314

0114

1113

0913

0713

0513

0313

0113

1112

0912

0712

0512

0312

0112

1111

0911

0711

0511

0311

0111

1110

0910

0710

0

0510

0

0310

5

0110

5

Last Observation: August 07, 2015. Inclusive of loans extended by all types of banks (deposit banks, Participation banks, and development/investment banks). FX adjusted.

31

ROAD MAP DURING THE NORMALIZATION OF GLOBAL MONETARY POLICIES

32

Simplification of the Interest Rate Policy Implementation During normalization of global monetary policies, the interest rate corridor will be made more symmetric around one-week repo interest rate and the width of the corridor will be narrowed.



13

Interest Rate Corridor

CBRT Average Fund Rate

BIST Interbank Market O/N Rates

One-Week Repo Rate

13

Source: CBRT

08/15

07/15

06/15

05/15

04/15

03/15

02/15

01/15

12/14

3

11/14

3

10/14

4

09/14

4

08/14

5

07/14

5

06/14

6

05/14

6

04/14

7

03/14

7

02/14

8

01/14

8

12/13

9

11/13

9

10/13

10

09/13

10

08/13

11

07/13

11

06/13

12

05/13

12

Last Observation: August 14, 2015.

33

Simplifying the Operational Framework of the TL Liquidity Management



The quotation on the lending to primary dealers via repo transactions will be terminated without changing the funding cost of primary dealers from the CBRT (before normalization).



Collateral conditions normalization).

will

be

simplified

(before

and

during

34

Operational Framework with Primary Dealers Facility 12.25 150 bp

CBRT O/N Lending Rate

10.75

50 bp

10.25 PD Repo Rate

350 bp

7.50 One Week Repo Rate 7.25 CBRT O/N Borrowing Rate

10:00

11:00

725 bp

15:00 OMO+Interbank

16:00

17:00

0.0 Hours

LON

35

Operational Framework without Primary Dealers Facility 12.25 150 bp

CBRT O/N Lending Rate

10.75 350 bp

7.50 One Week Repo Rate 7.25 CBRT O/N Borrowing Rate

10:00

11:00

725 bp

15:00 OMO+Interbank

16:00

17:00

0.0 Hours

LON

36

FX Liquidity Measures: Flexible FX Sale Auctions Flexibility of FX sale auctions is increased to contain exchange rate volatility. FX Sale Auctions (Million USD ) 120

1200

Monthy Quantity of FX Sales* (Right Axis) Daily FX Sales

100

1000

80

800

60

600

40

400

20

200

Source: CBRT

08/15

07/15

06/15

05/15

04/15

03/15

02/15

01/15

12/14

11/14

10/14

09/14

08/14

0

07/14

0

06/14



*The value for August is as of August 14, 2015. Last Observation: August 14, 2015.

37

FX Liquidity Measures: Reserve Requirement Policies FX liquidity will be released via reserve requirement policies (before and during norm.). CBRT Reserves (Billion USD ) FX for FX RR

140

CBRT Other FX Reserve

ROM FX

CBRT Other Gold Reserves

Gold for Precious Metal

ROM Gold

120 100 80 60 40 20

Source: CBRT

07/15

05/15

03/15

01/15

12/14

10/14

08/14

06/14

04/14

02/14

12/13

10/13

08/13

06/13

05/13

03/13

01/13

11/12

09/12

07/12

05/12

03/12

01/12

11/11

0

09/11



Last Observation: July 31, 2015.

38

FX Liquidity Measures: Foreign Exchange Deposit Market



Borrowing limits on foreign exchange deposit accounts will be increased (before normalization).



After the planned change, size of the FX liquidity financial system can access from CBRT, which is the sum of FX holdings in ROM and limits of the foreign exchange deposit market, will be considerably above the external debt payments of the banks in the coming year.

39

Measures to Support Financial Stability: Lengthening the Maturity of Noncore FX Liabilities FX required reserve ratios for the newly originated FX noncore liabilities of the banks will be adjusted to encourage further maturity extension (before and during). Maturity Breakdown of Non-Core FX Liabilities (Percent)

60

Required Reserve Measures

55 Up to 1-Year

50

45

40

Longer than 3-Years

35

Source: CBRT

07/15

06/15

05/15

04/15

03/15

02/15

01/15

12/14

11/14

10/14

09/14

08/14

07/14

06/14

05/14

04/14

03/14

02/14

30

01/14



Last Observation: July 31, 2015.

40

Measures to Support Financial Stability: Supporting Turkish Lira Core Liabilities 

The remuneration rate of Turkish lira required reserves may be revised to reduce the intermediation cost of banking sector and to support core liabilities. Credit/Deposit Ratio (Percent) 130

130

120

120

110

110

100

100

90

90

Announcement of Required Reserve Measures in Financial Stability Report

80

80

Source: BRSA

0515 0715

1114 0115 0315

0914

0714

0913 1113 0114 0314 0514

0713

0113 0313 0513

0912 1112

0512 0712

0112 0312

0911 1111

0511 0711

1110 0111 0311

0910

0510 0710

70

0110 0310

70

Last Observation: August 07, 2015.

41

Measures to Support Financial Stability: Remuneration of FX Required Reserves The remuneration rate of the USD denominated required reserves, reserve options and free reserves held at the CBRT will be held close to the upper end of the Fed funds target rate range (before and during normalization). Euro

USD

Deposit Rate (EUR) (%)

Deposit Rate (USD) (%) 5

Remuneration Rates Applied To Req. Res. in USD (%) (Right Axis )

4,5 4

5 4,5

2,5

2,5

Commission Rates Applied to Accounts in EUR (%) (Right Axis)

2

2

4

3,5

3,5

3

1,5

1,5

3

2,5

2,5

2

2

1,5

1

1

0,5

0,5

1,5

1

1

0

0

0,5

Source: CBRT

0815

-0,5

0715

-0,5

0615

0815

0715

0

0615

0

0515

0,5

0515



Last Observation: August 14, 2015.

42

Overview: Macroeconomic Outlook and Monetary Policy 

Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. External demand remains weak, while domestic demand contributes to growth moderately.



Processed food and energy price developments affect inflation favorably in the short run, while exchange rate movements delay the improvement in the core indicators. Considering this delay and taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the Committee decided to implement a tighter liquidity policy as long as deemed necessary.



The Committee also discussed the roadmap to be implemented before and after global monetary policy normalization and decided to publish a strategy document with today’s policy statement.



Future monetary policy decisions will be conditional on the improvements in the inflation outlook. 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. 43

THE ECONOMIC OUTLOOK AND MONETARY POLICY

August 19, 2015