Inflation in the first quarter of 2007, as foreseen, remained within the uncertainty band set around the path consistent with the target, whereas the decline in inflation stagnated in the last quarter due to both considerable increases in food prices, arising from drought as well as global conjuncture, and adjustments in administered prices. Thus, it has become obvious that the year-end inflation would remain outside the uncertainty band. Though the Central Bank has targeted the CPI inflation, it has pursued an effective communication strategy by referring to core measures at times of price movements beyond its control and pursued an effective communication strategy. In line with the positive outlook of inflation trend in prices excluding energy, food and administered prices, a measured rate cut cycle has been initiated in September 2007. Accordingly, the overnight borrowing rate was decreased by 175 basis points in total until the end of 2007, from 17.50 percent to 15.75 percent. The Central Bank has made significant progress over the last two years in terms of communication policy, transparency and accountability. Despite the fact that inflation remained above the path consistent with the target due to a series of supply-side shocks over the past two years, the inflation expectations for the next 12 and 24 months indicate low levels such as 6.1 and 5.2 percent, which have not been experienced for many years in our economy. This shows that inflation targeting regime has highly succeeded in managing expectations.

The “Price Developments” report will be published on the working day following the announcement of inflation data. Beside these communication tools, speeches and presentations made by Central Bank autorities at the meetings in Turkey or abroad constitute an important pillar of the communication policy. Working papers, booklets and technical notes published along with the conferences and workshops organized by the Bank will be used as effective tools for communication policy. 1  The publication calendar for the Inflation Report and the Financial Stability Report along with the Monetary Policy Committee Meeting dates are presented in the Appendix. BIS Review 4/2008  5  Exchange rate policy and liquidity management Exchange rate policy and foreign exhange buying auctions Along with inflation targeting, the Central Bank will continue to implement floating exchange rate regime in 2008. As stated in the annual monetary and exchange rate policy announcements that have been published since 2002, the foreign exchange rate is neither a target, nor a policy tool in the floating exchange rate regime. Exchange rates are determined according to the supply and demand conditions in the market. The main factors affecting foreign exchange supply and demand are the monetary and fiscal policies implemented, international developments, economic fundamentals, and expectations. Even if floating exchange rate regime has been adopted, keeping a strong foreign exchange reserves position is very important in emerging economies like Turkey to eliminate the unfavorable effects of potential internal and external shocks and to boost confidence in the country’s economy.