16 october 2007 14 november 2007 13 december 2007 17 january 2008 no change no change no change no change no change no change no change no change - 0. 25 - 0. 50 - 0. 50 - 0. 50 - 0. 25 17. 50 17. 50 17. 50 17. 50 17. 50 17. 50 17. 50 17. 50 17. 25 16. 75 16. 25 15. 75 15. 50 source : cbrt. both the 12 - month and 24 - month ahead inflation expectations exhibited a declining pattern throughout 2007 ( figure 10 ). however, the improvement in expectations, especially in the last quarter, was rather limited, owing to backward looking behavior, and possibly due to preannounced hikes in administered energy prices. nevertheless, it is worthwhile to mention that the administrative price hikes in november had little effect on medium - term inflation expectations, despite the upward revision in the year - end inflation expectations. this observation shows that inflation target, to a significant extent, continue to serve as an anchor and that economic agents expect the disinflation process to continue in the medium term. nevertheless, the fact that currently medium - term inflation expectations are significantly above our medium term target of 4 percent necessitates a cautious policy stance 1. figure 10 : medium - term inflation expectations * 12 - month 24 - month expectations regarding the period after 24 months have been published since may 2006. source : cbrt. as of january, one - year and two - year ahead inflation expectations are 6. 01 percent and 5. 17 percent, respectively. 3. inflation and monetary policy outlook distinguished guests and press members, after summarizing inflation and monetary policy developments in 2007, in this part of my speech, i would like to share our evaluations on inflation and the monetary policy outlook. first of all, i would like to summarize several factors that might enable the disinflation process to continue in the upcoming period : annual percentage change in cpi excluding food, energy and tobacco imply an inflation trend of 4. 8 percent ( figure 11 ) 2. in other words, underlying inflation in the past year was not far away from the medium - term targets. therefore, under the assumption that oil and food inflation will follow a more benign path in 2008 than 2007, we expect some contribution to disinflation from the base effects. figure 11 : response of inflation to monetary tightening policy rates h ( right axis ) h exc. processed food

( right axis ) h : unprocessed food, energy, alcohol beverages - tobacco, and gold excluded cpi. source : turkstat, cbrt. we believe that existing supply and demand conditions continue to support disinflation. the sharp slowdown in the second half of 2006 created an ample slack in the economy ( graph 12 ). although domestic demand showed some signs of recovery in the second half of the year 2007, the pace of economic activity does not appear to be fast enough to eliminate the output gap. moreover, the uncertainty created by the ongoing difficulties in the mature credit markets is expected to hold back the domestic consumer and investment spending in the forthcoming period. accordingly, our medium term projections are constructed under the assumption that demand and capacity conditions contribute to the disinflation process throughout 2008. official core inflation measures, published under the name “ special cpi aggregates “ ( sca ), do not exclude processed food prices. we believe that excluding this item, in line with the international practice, could give a better proxy for recent inflation trends. figure 12 : output gap - 2 - 4 monetary tightening - 6 07 - iii 07 - i 06 - iii 06 - i 05 - iii 05 - i 04 - iii 04 - i 03 - iii 03 - i 02 - iii 02 - i 01 - iii 01 - i 00 - i - 10 00 - iii - 8 monetary conditions continue to support the disinflation process. despite the recent rate cuts, monetary policy can still be considered to be in the restrictive territory. underlying rate of monetary expansion remains modest, consistent with a relatively restrictive monetary stance. although medium term interest rates followed a downward trend in the past quarter, 2 - year - real rates at this point fluctuate between 9 and 10 percent, implying a nonaccommodative monetary stance. moreover, the currency remains strong, curbing inflationary pressures and easing the impact of rising commodity prices on domestic production costs. ( figure 13 ). figure 13 : real interest rate and real exchange rate * real exchange rate ( left axis ) 2 - year real interest rates * real interest rates are computed by using the expectations survey and 2 - year nominal rate estimated with extended nelson - siegel method. real exchange rate is cpi based ( an increase means an appreciation ). source : cbrt. credit data also confirm that monetary conditions are still non - accommodative. annual growth rates in the automobile and housing loans are at much lower levels compared to the