sureyya serdengecti : falling inflation opening remarks by mr sureyya serdengecti, governor of the central bank of the republic of turkey, for the conference on " real sector and financial sector in the environment of falling inflation ", organised by the banks association of turkey, ankara, 28 september, 2004, and given at the monthly meeting of ankara chamber of commerce, ankara, 29 september 2004. * * * dear guests, in my speech today, i would like to dwell on the “ environment of “ falling inflation ”, its main impacts on economy both in other countries and turkey and finally, the significance of maintaining price stability for turkey ’ s economy. the achievements obtained on the inflation front in the last three years under the current program allow us to speak about falling inflation environment and permanent price stability. now, let me briefly review the point we have reached in the fight against inflation : cpi inflation, which was 68. 5 percent at the end of 2001, remained below the targets set in 2002 and 2003 and fortunately, it realized as 18. 4 percent at the end of 2003. in 2001 - 2003 period, the total decline in inflation exceeded 50 points. in august, cpi inflation fell to 10 percent thanks to the stability program, which was determinedly carried out in 2004, and the tight monetary and fiscal policies implemented within the framework of this program. looking at the cpi inflation today, i do not see any serious problem that would prevent us from reaching the 12 percent - cpi inflation target for 2004. however, despite the success attained in reducing inflation, i would like to underline the fact that we have not reached our final target yet. turkey is one of the very few countries where double - digit inflation prevails. as i have mentioned repeatedly both at the very beginning of the disinflation program and the point we reached today, our final target is to achieve and maintain price stability. now let me emphasize once more what price stability stands for. the well - known definition of price stability relates to the currently low inflation rate in one hand, and the expectation of economic agents that the ongoing decline in inflation will continue in the future. such an inflation rate is so low that people do not need to take it into account in their investment, consumption and saving decisions. at the point we have reached in inflation, it is clear that our economy is surviving from chronic inflation. however, i would like to draw your attention to the fact that we have not fully maintained

fighting against this trend through over restrictive capital controls or excessive reserve accumulation, there is strong legitimacy in using macro - prudential policies to mitigate the adverse effects of volatility in capital flows, especially those with speculative nature, over financial stability. several emerging economies have started implementing such measures to limit the credit growth and asset price bubbles. these measures include raising reserve requirement ratios, requiring higher income - and deposit - to - loan ratios, tightening capital adequacy requirements and liquidity ratios, introducing transaction taxes, fees etc. the adequacy of such measures has yet to be seen, but the swift and proactive response of policy makers is a positive step forward, as the most recent events have clearly demonstrated that it is likely to cost less to undertake preventive measures prior to a crisis than to clean up in its aftermath. of course, economic conditions and institutions differ across countries. an effective macro prudential tool in one country might not work in another country. therefore, policy makers need to take country specific factors into account in designing their own framework. it is also imperative for the academic community and international organizations to focus on this issue and develop a set of concrete policy tools that national authorities, at their own discretion, can use to identify, assess and manage systemic risks. financial stability and central banks the critical importance of financial stability from a central bank ’ s perspective is not new. smooth functioning of the financial system and payment mechanism has been a concern of central banks since their foundation. in fact, that is the reason they are called as “ the bank of banks ” or “ the lender of last resort ” for financial institutions. however, over time as the financial system gets more complicated and expanded exponentially, its supervision and regulation has been partially transferred to other institutions. the challenge faced by central banks is to establish a framework that combines both price and financial stability as primary mandates and identify the policy instruments to target both, even at times they seem to conflict with each other. bis central bankers ’ speeches central banks have typically calibrated short - term interest rates as their primary policy instrument to determine their monetary stance. since policy rates are too blunt instruments that affect the entire economy, using them to achieve both of these targets may lead to unintended consequences. the level of interest rate required to ensure price stability can differ from an interest rate needed to preserve financial stability. for example, during boom periods driven by productivity and financial innovation shocks, a low policy rate would suffi