CBT: Potential of the growth is dependent on structural reforms
Central Bank of Turkey released summary of the Monetary Policy Committee Meeting held on December, 20.
The expectations regarding the upcoming period are compiled as follows:
Leading indicators regarding December suggest an uptick in annual food inflation on account of the unprocessed food inflation. Energy prices increased by 1.05 points in November and the depreciation in the Turkish lira resulted in overall price hikes in the sector. Thus, annual energy inflation rose by 1.44 points to 6.15 percent. The rise in energy prices is expected to continue in December due to the uptrend in the exchange rate coupled with oil prices. In addition to food and energy groups, recent tax adjustments introduced to some items, chiefly tobacco products, is envisaged to put a noticeable upside pressure on December inflation.
Recent data indicate that economic activity rebounded somewhat in the fourth quarter after the third-quarter deceleration. With working day losses led by extended religious holidays counterbalanced and the underlying trend on a modest upward track, industrial output increased in October. Data on the production and exports of electricity and vehicles point to further growth in industrial output for November. Thus, industrial production is likely to post a quarterly gain in the fourth quarter thanks to the base effect from unworked days. However, apart from the very much technical recovery driven by working day effects, the economy recovery seems to be a moderate one yet to spread across all sectors.
Economic activity edged up in the fourth quarter and is expected to record a moderate growth in 2016. However, the potential impact of recent global and geopolitical developments on financial conditions and the lack of any signs of a rosy tourism outlook remain a downside risk to the pace of economic recovery.
Measures taken by the Economic Coordination Committee to uplift the real sector are expected to help commercial loans increase in the upcoming period.
Domestic demand is expected to start recovering by the fourth quarter amid accommodative incentives and measures. Yet, global market turmoil and geopolitical risks keep a firm lid on the pace of economic recovery. Thus, economic activity is likely to grow moderately in the upcoming period. The CBRT will continue to monitor the developments in economic activity and their implications for price stability and financial stability. The Committee stated that adopting structural reforms might boost the economy's growth potential to a large extent.
Exchange rate movements and rising oil prices fueled by the recently heightened global uncertainty pose an upside risk to the inflation outlook. Recent price movements and current weather forecasts add to the upside risks to food prices for the coming months, which, however, are curbed by aggregate demand. The Committee agreed that future developments should be closely monitored to determine the net effects of these factors on the inflation outlook for 2017.
Monetary policy decisions will depend on the inflation outlook in the upcoming period. The CBRT will maintain its cautious stance in light of future developments in inflation expectations, the pricing behavior and other factors affecting inflation.
Developments in 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 in 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.
In recent years, sustaining fiscal discipline has become one of the major factors in reducing the sensitivity of the Turkish economy against external shocks. In the current environment of high global uncertainty, it is critical to maintain and further enhance these achievements. Any measure to provide permanent fiscal discipline and to reduce the savings deficit will support macroeconomic stability and contribute positively to social welfare by keeping the interest rates of long-term government securities at low levels.