years. for the first time in many years, inflation figures of the developing countries are in two digit levels. in this period central banks have adopted different approaches for fighting inflation. one reason of this divergence is the difference between the objectives of central banks. for example, the federal reserve bank of the united states, with ultimate goals of price stability, financial stability and full employment, lowered interest rates by 325 basis points between september 2007 and june 2008 due to severe problems in the financial system. the european central bank, on the other hand, has followed a more hawkish attitude and focused on attaining its primary objective, which is price stability. the disparity between the consumption patterns is another factor causing divergence in monetary policies. in comparison to the industrialized world, food expenditures in developing countries constitute a larger share in the basket of consumer prices. that is why increases in food prices typically lead to higher increases in the inflation rates of developing countries. this is one of the reasons why central banks of developing countries focus more on price stability and display a tighter monetary policy stance in recent months. to put it in figures, since mid - 2007, policy rates in sixteen major developing countries have increased by 110 basis points on average – in contrast to developed countries where policy rates have been cut by 98 basis points on average. the exchange rate regime also affects the conduct of monetary policy. as you may all know, many developing countries peg their currencies against the us dollar or the euro. as the us dollar has lost value against many currencies in recent years, this has led to sharp increases in the inflation rates of those economies whose currencies are pegged to the us dollar. in the period of january 2006 to may 2008, inflation rates of countries whose currencies are pegged to the us dollar have increased three - fold to 15. 1 percent from 3. 9 percent. inflation rates of countries whose currencies are pegged to the euro rose to 10. 2 percent from 4. 4 percent. in this period, countries that avoid the nominal appreciation of their currencies have only exacerbated the inflationary effects of supply shocks. the necessary adjustments in real exchange rates have taken place through the rise general price level. until recently, the common view among central banks of developed countries was to give priority to problems in financial markets in absence of inflationary pressures. however, they have slowly acknowledged the fact that the increase in inflation has reached critical levels. accordingly, with

path that can be taken as reference by economic agents and that would take us to our price stability objective in the medium term, which is an inflation rate of 4 percent. as you may know, turkey has not witnessed low single - digit inflation figures for nearly half a century. this has adversely affected the expectations for attaining the 4 percent inflation target. furthermore, overshooting the inflation targets in 2006 and 2007, and recent supply shocks have elevated expectations even further. hence, the new targets announced on june 3, 2008 aim to create a new anchor for economic agents, that is attainable. at this point, i would like to emphasize that the nature of these new targets differ remarkably from those set for the 2006 - 2008 period. the central bank will treat the revised targets asymmetrically. in this framework, in the upcoming period, the central bank will prefer an inflation that stays below targets rather than otherwise. accordingly, better than expected outcomes in food and energy prices or in other global factors will be perceived as an opportunity to bring down inflation faster than that is implied by the revised target path. should the upside risks materialize ; monetary policy will be conducted so as to minimize any upside deviation of inflation from the revised targets. target revision is the solution that is provided by our bank to the aforementioned “ problem of demarcation ”, which is faced by almost all central banks today. however, the revision will work only if necessary policy stance is adopted. for this reason, the second pillar of monetary policy comprises the implementation of a monetary tightening that is consistent with the new inflation targets. newly set targets are references that would help decision makers in the economy understand the reasoning behind the policy stance, i. e. the factors that have led to monetary tightening and the extent of monetary tightening if and when necessary. in other words, the central bank has announced, via the target revision, the limits of its tolerance to the first round impacts of supply side shocks. dear guests, in this part of my speech, i would like to cover the central bank ’ s reasons for implementing a measured course of monetary policy tightening, in further detail. obviously, interest rate decisions are not taken in order to curbe hikes in food and energy prices. it is not possible to control direct effects of supply side shocks with monetary policy tools. the central bank has been implementing a monetary tightening to offset the secondary effects of supply shocks. since domestic demand is growing at a moderate pace at the moment, it has been