Economic outlook and monetary policy presentation by Central Bank of Turkey

1. THE ECONOMIC OUTLOOK AND
MONETARY POLICY
March 25, 2016

2. 2
Overview: Macroeconomic Outlook and Monetary Policy
• The favorable developments in the terms of trade and the moderate
course of consumer loans contribute to the improvement in the current
account balance.
• Demand from the European Union economies support exports at an
increasing pace, despite elevated geopolitical risks in other export
markets.
• Recently, global volatility has eased to some extent. Moreover, the use
of the policy instruments laid out in the roadmap published in August
2015 reduced the need for a wide interest rate corridor.
• In this respect, the Committee decided to take a measured step
towards simplification.
• However, improvement in the underlying core inflation trend remains
limited, necessitating the maintenance of a tight liquidity stance.

3. 3
Outline
1. Economic Activity
2. External Balance
3. Inflation
4. Monetary and Financial Conditions

4. 4
ECONOMIC ACTIVITY

5. 5
Source: TURKSTAT.
Annual GDP Growth and Contributions
(Percentage Points)
GDP continues to grow at a robust and steady pace.
-10
-5
0
5
10
15
20
03/10
06/10
09/10
12/10
03/11
06/11
09/11
12/11
03/12
06/12
09/12
12/12
03/13
06/13
09/13
12/13
03/14
06/14
09/14
12/14
03/15
06/15
09/15
Change in Inventories
Net Exports
Final Domestic Demand
GDP
Last Observation: 2015 Q3

6. Confidence indicators display a volatile course.
6
Consumer Confidence Investment and Employment Prospects
(Seasonally Adjusted)
Source: Bloomberg HT, TURKSTAT,
CBRT.
Last Observation: February 2016 for Bloomberg HT Survey,
March 2016 for TURKSTAT-CBRT Survey.
Source: CBRT Business Tendency Survey
Last Observation: March 2016.
50
55
60
65
70
75
80
85
90
50
60
70
80
90
100
110
01/12
05/12
09/12
01/13
05/13
09/13
01/14
05/14
09/14
01/15
05/15
09/15
01/16
Bloomberg HT TURKSTAT-CBRT (rhs)
0
5
10
15
20
25
01/12
04/12
07/12
10/12
01/13
04/13
07/13
10/13
01/14
04/14
07/14
10/14
01/15
04/15
07/15
10/15
01/16
Investment Tendency Employment Tendency

7. Recently, industrial production has continued to expand at a
moderate pace, while export orders have somewhat weakened.
7
Industrial Production and Capacity Utilization
(Seasonally Adjusted)
Business Orders (Survey Outcome)
(Last 3 months, Seasonally Adjusted)
Source: TURKSTAT, CBRT. Last Observation: January 2016 for Industrial Production,
March 2016 for Capacity Utilization.
Source: CBRT Business Tendency Survey. Last Observation: March 2016.
70
71
72
73
74
75
76
77
78
105
110
115
120
125
130
01/12
04/12
07/12
10/12
01/13
04/13
07/13
10/13
01/14
04/14
07/14
10/14
01/15
04/15
07/15
10/15
01/16
Industrial Production
Capacity Utilization (rhs)
-10
-5
0
5
10
15
20
01/14
03/14
05/14
07/14
09/14
11/14
01/15
03/15
05/15
07/15
09/15
11/15
01/16
03/16
Exports Domestic

8. Source: TURKSTAT, Household Labor Force Survey, CBRT.
Employment continues to increase at a steady pace.
Last Observation: December 2015.
8
7
9
11
13
15
05/10
09/10
01/11
05/11
09/11
01/12
05/12
09/12
01/13
05/13
09/13
01/14
05/14
09/14
01/15
05/15
09/15
Unemployment Rate (percent)
Non-farm Unemployment Rate (percent)
19
20
21
22
23
24
25
26
27
28
42
44
46
48
50
52
54
05/10
09/10
01/11
05/11
09/11
01/12
05/12
09/12
01/13
05/13
09/13
01/14
05/14
09/14
01/15
05/15
09/15
Thousands
Participation Rate (%)
Employment (millions, right axis)

9. 9
EXTERNAL BALANCE

10. 10
Source: TURKSTAT.
Exports to European Union
(12 months cumulative, billion Euros)
Demand from the European Union economies support exports
at an increasing pace, ….
Last Observation: : January 2016.
30
35
40
45
50
55
60
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
0515
0915
0116

11. …. despite elevated geopolitical risks in other export markets.
11
Exports to Russia
(Monthly, Million USD)
Exports to Iraq
(Monthly, Million USD)
Source: TURKSTAT Last Observation: January 2016.
0,0
100,0
200,0
300,0
400,0
500,0
600,0
700,0
800,0
0109
0609
1109
0410
0910
0211
0711
1211
0512
1012
0313
0813
0114
0614
1114
0415
0915
0,0
200,0
400,0
600,0
800,0
1000,0
1200,0
1400,0
0109
0609
1109
0410
0910
0211
0711
1211
0512
1012
0313
0813
0114
0614
1114
0415
0915

12. 12
Source: TURKSTAT
The favorable impact of lower oil prices on the current account
balance is expected to continue in the forthcoming period.
Last Observation: January 2016.
Energy Imports
(12-Month Cumulative, Billion USD)
25
30
35
40
45
50
55
60
65
0110
0310
0510
0710
0910
1110
0111
0311
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0914
1114
0115
0315
0515
0715
0915
1115
0116

13. 13
Source: CBRT.
The improvement in the cumulative current account balance is
expected to continue in the coming periods.
Last Observation: January 2016.
Current Account Balance (CAB)
(12-Month Cumulative, Billion USD)
-80
-70
-60
-50
-40
-30
-20
-10
0
10/10
12/10
02/11
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
CAD
CAD (Excluding gold)

14. 14
Source: CBRT.
(12-Months Cumulative, Billion USD)
Current account deficit is financed through long term borrowing
and FDI flows.
*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: January 2016.
-5
5
15
25
35
45
55
65
75
85
10/10
12/10
02/11
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
Portfolio and Short Term FDI and Long Term CAD

15. 15
INFLATION

16. 16
Source: TURKSTAT.
(Annual Percentage Change)
Headline inflation has declined recently, but core indicators have remained
at high levels due to lagged impact of exchange rate developments.
Last Observation: February 2016.
3
4
5
6
7
8
9
10
11
12
13
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
02/16
CPI H I

17. Cost push inflationary pressures have eased in recent months due to
a gradual fall in imported input prices.
17
Import Price Index
(2010=100)
Source: TURKSTAT, CBRT. Last Observation: January 2016.
50
70
90
110
130
150
170
190
0103
0503
0903
0104
0504
0904
0105
0505
0905
0106
0506
0906
0107
0507
0907
0108
0508
0908
0109
0509
0909
0110
0510
0910
0111
0511
0911
0112
0512
0912
0113
0513
0913
0114
0514
0914
0115
0515
0915
0116
Import Prices (in USD) Import Prices (in TL)

18. 18
Source: CBRT.
Medium term inflation expectations have slightly improved in March.
5,0
5,5
6,0
6,5
7,0
7,5
8,0
8,5
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
02/16
Inflation Expectations
(Percent)
12 months
24 months
Last Observation: March 2016.

19. 19
Monetary and Financial Conditions

20. 20
Recently, global volatility has eased to some extent and risk
appetite has improved.
VIX and MOVE Indices
(5-Day Average)
Source: CBRT
*The shaded area indicates the period after Fed rate hike.
Last Observation: March 22, 2016.
40
55
70
85
100
115
130
10
15
20
25
30
35
40
01/15
02/15
03/15
04/15
05/15
06/15
07/15
08/15
09/15
10/15
11/15
12/15
01/16
02/16
03/16
VIX (Percent)
MOVE (Basis Points, Right Axis)

21. 21
Source: EPFR.
Equity and Bond Flows to Emerging Markets
(Billion USD, 4-Week Moving Sum)
As a response, portfolio flows to emerging economies have
displayed some recovery in recent weeks, …
Last Observation: March 16, 2016.
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
01/12
03/12
05/12
07/12
09/12
11/12
01/13
03/13
05/13
07/13
09/13
11/13
01/14
03/14
05/14
07/14
09/14
11/14
01/15
03/15
05/15
07/15
09/15
11/15
01/16
03/16
Bonds
Equities

22. Source: Bloomberg.
… which has ben accompanied by falling risk premiums.
Last Observation: March 22, 2016.
22
100
200
300
400
500
600
700
800
100
200
300
400
500
600
700
800
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
02/16
EMBI Europe EMBI Turkey EMBI Latin America EMBI Asia
Regional EMBI Indices
(Basis Points)

23. 23
Source: Bloomberg
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
02/11
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
02/16
Emerging Economies* Turkey
Roadmap
Implied FX volatility
(1 month, Percent)
The volatility of the Turkish lira has declined relatively since the
adoption of the policy instruments set out in the August 2015 roadmap.
*Emerging market currencies include Brazil, Chile, Colombia, Mexico,
Poland, Czech Republic, South Africa, Indonesia, Romania against USD.
Last Observation: March 22, 2016.

24. 24
Summary of the MPC Minutes (February 2016)
• "The Committee stated that the wide interest rate corridor has
contributed markedly to containing exchange rate volatility in
times of heightened global volatility. The need for such an
instrument would be reduced, should the decline in global
volatility prove persistent.
• Another factor reducing the need for a wide interest rate corridor
is the effective use of the policy instruments laid out in the
roadmap published in August. Excessive fluctuations in both
exchange rates and loans have waned owing to the launch and
effective use of these instruments.
• The Committee still maintains the view that the monetary policy
may be implemented within a narrower and more standard
interest rate corridor, should global volatilities post a permanent
decline or the policy tools of the August roadmap permanently
contain the effects of the global volatility on the Turkish economy."

25. 25
Source: CBRT Last Observation: March 23, 2016.
3
4
5
6
7
8
9
10
11
12
13
3
4
5
6
7
8
9
10
11
12
13
05/13
06/13
07/13
08/13
09/13
10/13
11/13
12/13
01/14
02/14
03/14
04/14
05/14
06/14
07/14
08/14
09/14
10/14
11/14
12/14
01/15
02/15
03/15
04/15
05/15
06/15
07/15
08/15
09/15
10/15
11/15
12/15
01/16
02/16
03/16
04/16
Interest Rate Corridor CBRT Average Fund Rate One-Week Repo Rate
Interest Rates
(Percent)
In light of recent developments, the Committee decided to
take a measured step towards simplification.

26. 26
Source: CBRT Last Observation: March 23, 2016.
3
4
5
6
7
8
9
10
11
12
13
3
4
5
6
7
8
9
10
11
12
13
05/13
06/13
07/13
08/13
09/13
10/13
11/13
12/13
01/14
02/14
03/14
04/14
05/14
06/14
07/14
08/14
09/14
10/14
11/14
12/14
01/15
02/15
03/15
04/15
05/15
06/15
07/15
08/15
09/15
10/15
11/15
12/15
01/16
02/16
03/16
04/16
Interest Rate Corridor CBRT Average Fund Rate
BIST Interbank Market O/N Rates One-Week Repo Rate
Interest Rates
(Percent)
Yet, improvement in the underlying core inflation trend remains
limited, necessitating the maintenance of a tight liquidity stance.

27. 27
Flexible FX Sale Auctions
• FX demand is expected to decline significantly in the upcoming
periods due to improvement in the current account deficit and
low energy prices.
• Meanwhile, the FX liquidity tools will continue to be used to
stabilize the value of the Turkish lira.
• In this respect, flexible FX sales auctions will continue to supply
FX liquidity at amounts deemed necessary.

28. 28
Source: CBRT. Last Observation: March 22, 2016.
Yield curve remains flat.
-2
0
2
4
6
8
10
12
14
-2
0
2
4
6
8
10
12
14
04/11
06/11
08/11
10/11
12/11
02/12
04/12
06/12
08/12
10/12
12/12
02/13
04/13
06/13
08/13
10/13
12/13
02/14
04/14
06/14
08/14
10/14
12/14
02/15
04/15
06/15
08/15
10/15
12/15
02/16
5-Year 3-Month
5 year-3 month spread
Cross Currency Swap Rates
(Percent)

29. 29
Source: CBRT.
Consumer loan rates remain at high levels, reflecting tight
financial conditions.
Last Observation: March 04, 2016.
7
9
11
13
15
17
19
21
01/10
04/10
07/10
10/10
01/11
04/11
07/11
10/11
01/12
04/12
07/12
10/12
01/13
04/13
07/13
10/13
01/14
04/14
07/14
10/14
01/15
04/15
07/15
10/15
01/16
Other
Housing
Automobile
Interest Rates on Consumer Loans
(Percent)

30. 30
Source: CBRT.
Total Loan Growth Rate
(Year on Year Change, Percent)
Annual loan growth continues to decelerate in response to tight
monetary and financial conditions.
Last Observation: March 11, 2016.
Total loan is inclusive of all types of banks (deposit banks, participation banks, and
development/investment banks) and credit cards.
Adjusted for exchange rate.
0
5
10
15
20
25
30
35
40
01/11
03/11
05/11
07/11
09/11
11/11
01/12
03/12
05/12
07/12
09/12
11/12
01/13
03/13
05/13
07/13
09/13
11/13
01/14
03/14
05/14
07/14
09/14
11/14
01/15
03/15
05/15
07/15
09/15
11/15
01/16
03/16

31. 31
Source: CBRT.
Loan Growth Rates
(Annual Percentage Change)
Commercial loans grow at a faster pace than consumer loans, contributing
to price stability, financial stability, and the rebalancing process.
Last Observation: March 11, 2016.
Inclusive of loans extended by all types of banks (deposit banks,
Participation banks, and development/investment banks). FX adjusted.
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
0110
0310
0510
0710
0910
1110
0111
0311
0511
0711
0911
1111
0112
0312
0512
0712
0912
1112
0113
0313
0513
0713
0913
1113
0114
0314
0514
0714
0914
1114
0115
0315
0515
0715
0915
1115
0116
0316
Commercial
Consumer

32. 32
Overview: Macroeconomic Outlook and Monetary Policy
• The favorable developments in the terms of trade and the moderate
course of consumer loans contribute to the improvement in the current
account balance.
• Demand from the European Union economies support exports at an
increasing pace, despite elevated geopolitical risks in other export
markets.
• Recently, global volatility has eased to some extent. Moreover, the use
of the policy instruments laid out in the roadmap published in August
2015 reduced the need for a wide interest rate corridor.
• In this respect, the Committee decided to take a measured step
towards simplification.
• However, improvement in the underlying core inflation trend remains
limited, necessitating the maintenance of a tight liquidity stance.

33. THE ECONOMIC OUTLOOK AND
MONETARY POLICY
March 25, 2016