see why fighting inflation is so important. the high and chronic inflation led to considerable economic and social losses in turkey in the last 30 years. high and chronic inflation culminated in the adoption of short - term approaches, by adversely affecting expectations, investment and production decisions and deteriorating resource allocation in the economy, which brought along low and volatile rates of growth and employment and aggravated injustice in income and wealth distribution. we have experienced all the damage of inflation in turkey, so we expect all sections of the public to support our fight against inflation and defend the achievements we have made so far. it should be borne in mind that striving for price stability means striving for creating an environment where people can make a living, make investments and can look to the future with confidence. with this respect, price stability is a goal that cannot be sacrificed for any other priority or target. thanks to the policies implemented by our bank, great progress was made in the disinflation process : inflation, which was 73. 2 percent at the beginning of 2002, was recorded as 10. 26 percent in august 2006. within the framework of the fight against inflation, the central bank of turkey adopted the formal inflation - targeting regime as the monetary policy strategy at the beginning of 2006. now, i would like to mention a few points that i believe are important with respect to the adoption of the inflation targeting regime. studies on the inflation targeting regime as a monetary policy strategy were initiated at our bank in 2000. as of 2002, the “ implicit inflation targeting regime ” was adopted as a strategy of convergence with the formal inflation targeting regime and gradually the components of this regime were adopted. in line with these efforts, some changes were made in our bank ’ s organization and some new departments have been established, our set of data has been expanded and the decision - making processes have been further institutionalized. by 2005, the monetary policy strategy implemented under the name of the implicit inflation targeting regime had become a regime covering most of the elements of formal inflation targeting and significant achievements had been made in the pre - conditions necessary for a successful transition to the formal inflation targeting regime. in 2006, encouraged by our achievements, the “ formal inflation targeting regime ” was adopted on time. the new regime necessitated a more institutionalized structure and a higher degree of transparency compared to the previous one. in order to have a more comprehensive understanding of the course of inflation and the policy decisions of the central bank it is essential to have a good grasp of the framework

national income, the ratio of the current account deficit was 6. 4 percent by the end of 2005. the said ratio rose to 6. 9 percent in the first quarter of 2006. certainly, high rates of current account deficit are not peculiar to turkey and can also be observed in other transition economies that grow at similar high rates. for instance, the ratio of current account deficit to gross domestic product is 11. 8 percent in bulgaria, 8. 7 percent in romania, 7. 9 percent in hungary and 7. 2 percent in the slovak republic, as of 2005 1. higher rates of global and financial integration enable countries to sustain higher rates of current account deficit, to the extent that the robustness of their macroeconomic fundamentals allows. due to the impact of these conditions, a current account deficit on a higher plateau has also been sustained in turkey in recent years. imf, world economic outlook, april 2006 the recent high increase observed in the current account deficit in turkey is not the result of the increase in consumption, but comes from the increase in investments that boosts the production capacity. crude oil prices, which have been following a high and volatile course in international markets and maintaining their upward trend in recent years, stand as another factor explaining the widening of the current account deficit. when oil prices are taken as those of the year 2000, it can be said that the ratio of current account deficit to national income is 1. 2 percentage points lower as of the first quarter of 2006. meanwhile, it is expected that the depreciation of the turkish currency due to recent fluctuations in financial markets, monetary policy tightening and the relative decline in domestic demand will slow economic activity and imports to a certain extent as of the second half of the year. as for exports, the upward trend is anticipated to gain momentum in line with increased foreign demand. in this framework, it is expected that the ratio of current account deficit to gross national product will fall in 2006 compared to 2005. the quality of financing is very important for the sustainability of the current account deficit and for preventing the perception that the current account deficit is a risk. the quality of financing in turkey has improved significantly, especially due to the favorable impact of the structural transformation process and has enhanced the macroeconomic conditions observed in the last five years. long - term capital is assuming an increasingly important role in the financing of the current account deficit. by june, 82 percent of the current account deficit has been financed with long - term capital alone. meanwhile, the