Cb: Monetary Policy Decisions Will Be More Sensitive To İncoming Data

In the short-run, monetary policy decisions would be "more sensitive" to incoming data and the monetary policy stance would be revised upon detection of changes in the inflation outlook, according to the minutes of the Monetary Policy Committee meeting, released by the Central Bank of Turkey.

"Recent developments regarding the inflation outlook point to significant risks to price stability" said the minutes, adding that "price increases have shown a generalized pattern across subsectors, reflecting the movements in exchange rates."

"Although weaker domestic demand conditions will partially mitigate the deterioration in the inflation outlook, upside risks to the pricing behavior continue to prevail" read the minutes and went on as follows:

"The significant increase in producer prices-driven cost-side pressures,  and the elevated levels of inflation and inflation expectations continue to pose risks to the inflation outlook in the coming period.

"Accordingly, the Committee has decided to maintain the tight monetary policy stance and keep the policy rate (one week repo auction rate) constant at 24 percent.

"The Central Bank will continue to use all available instruments in pursuit of the price stability objective.

"The tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement.

"Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to the rebalancing process, and other factors affecting inflation will be closely monitored and if needed, further monetary tightening will be delivered.

"The outlook that the medium-term projections presented in the Inflation Report (released on Wednesday) are based on is shaped by the Monetary Policy Committee's judgments and assumptions.

"Nevertheless, various risks to these factors may affect the inflation outlook and necessitate changes in the monetary policy stance envisaged in the baseline scenario.

"The Committee noted that risks to the medium-term inflation outlook are mostly on the upside.

"The primary risk to inflation outlook in the upcoming period would be a further deterioration in pricing behavior.

"The deteriorated pricing behavior, tight financial conditions and the financial state of the corporate sector have recently caused inflation dynamics to change and the uncertainty over inflation and forecasts to rise.

"The cumulative cost pressures on firms and the decrease in their profitability, coupled with increased working capital costs and the backward indexation behaviour in wages, may cause the disinflationary impact of the demand channel to be more limited compared to the implications of the historical data.

"In the short-run, monetary policy decisions will be more sensitive to incoming data and the monetary policy stance will be revised upon detection of changes in the inflation outlook.

"In the third quarter of the year, credit conditions recorded a significantly higher tightening than historical averages due to incresing risk premiums.

"The rate and extent of the normalization to be observed in credit conditions in the upcoming period are important in terms of the outlook of economic activity.

"The coordination between the monetary policy and the fiscal policy is very crucial with respect to disinflation and macroeconomic rebalancing.

"The fiscal policy outlook that the medium-term projections in the Inflation Report are based on incorporates a policy stance that focuses on disinflation and macroeconomic rebalancing and that is coordinated with the monetary policy, which is in line with the New Economy Program announced in September.

"Accordingly, the projections rest on an outlook where the fiscal policy introduces a tight fiscal discipline, as envisaged in the New Economy Program.

"Moreover, it is assumed that administered prices, tax and wage adjustments will be formulated in a way that will help reduce the backward-indexation behavior. If the fiscal policy significantly deviates from this framework leading to an adverse impact on the medium-term inflation outlook, the monetary policy stance may be revised.

"Collective efforts to turn the recently enhanced coordination between monetary and fiscal policies into a sustained and systematic structure are expected to support the fight against inflation.

"Moreover, continued structural steps focusing on reducing rigidity and volatility in inflation will contribute to price stability and social welfare." - Istanbul

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