“ wait - and - see ” approach in the face of supply shocks are not clear on the question of when the supply shock ends and when demand - driven price increases take its place, in an environment where inflation keeps rising. if this issue is not clarified, any above - target inflation figure or any upward revision in inflation forecasts can easily be attributed to supply - side factors. clear lines should be drawn as to which economic data would refute this discourse and what would constitute a limit to supply shocks from a central banker ’ s point of view. dear guests, in the last part of my speech, i would like to discuss recent developments in the turkish economy and the monetary policy implemented in this period. in early 2008 the supply side shocks in food and energy prices started to exert significant inflationary pressures, as they reached unprecedented levels above and beyond expectations. for instance, october 2007 inflation report, based on forecasts of international agencies, had foreseen oil prices around usd 70 per barrel in 2008 and a gradual correction in food prices. in other words, it was assumed that supply side shocks would be temporary and that they would lose impact after a while. these forecasts were in line with pricing in forward and futures markets. however, these expectations did not materialize. both crude oil prices and agricultural commodity prices continued to rise. the adverse impacts of supply shocks reached unprecedented levels during the first half of 2008. under normal circumstances, supply shocks are expected to have a temporary impact on relative prices, not changing the course of medium - term inflation. nevertheless, the emergence of multiple shocks at the same time and their persistence for a considerable period aggravated the risks on pricing behavior. in fact, the research conducted by the central bank staff indicates that economic agents increasingly focus on past inflation while forming their inflation expectations. after evaluating the said developments, the central bank concluded that the increases in food and energy prices in recent years reflect a structural change stemming from the global economic environment. in other words, these shocks are likely to prevail for a longer time period, contrary to previous forecasts. there is no clear evidence at this point that this trend will reverse in the short term. moreover, our revised projections suggest that even with the maintenance of a cautious monetary policy stance for the foreseeable future, reaching the 4 percent target is going to take an extended period of time. dear guests, in light of these evaluations, the central bank of turkey announced the framework of its monetary policy for the upcoming

food inflation. inflationary pressures triggered by severe drought and related crop losses have been waning for some time around the world, including turkey. early forecasts for 2008 suggest that the weather will be more accommodating than 2007. as measured by current indicators, grain production will particularly rebound from its year - ago levels. the rate of increase in food prices is likely to decelerate during the second half of 2008. yet, despite better prospects on the supply side, food prices are expected to stay elevated in the near future in the medium term as long as the demand pressure from rapidly - growing developing countries continues. let me give you a few numbers and explain my reasoning. as i mentioned before, food expenditures in developing countries constitute a larger share in the basket of consumer prices than those on developed countries. it is as low as 15 percent in the u. s., as high as 60 percent in india. moreover, income elasticity of food is also significantly higher in less developed countries. in bangladesh, one percent increase in household income leads to 0. 73 percent increase in food demand. in the u. s., however, a typical household who receives one extra dollar spends only 10 cents more on food. what does it mean? it means that as long as rapid growth rates in developing countries continue, the food demand is also likely to rise rapidly. in the post war period, we did not observe a similar surge in food demand, because the engine of world economy at that time was mainly advanced economies. today, we face a different picture. emerging market countries are growing fast. their share in world consumption is three times higher than what it was in early 80s. more importantly, these countries, like china, india, and indonesia have huge populations. according to our estimates at the central bank of turkey, the contribution of only two countries ( china and india ) on food demand growth in the world reached almost 50 percent in 2007 – up from 10 percent in 1980. the growth in global food demand is estimated to exceed the growth in global food supply since early 2000s and it is likely to stay that way in the near future. in other words, we are facing a gap between food demand and food supply. prices have to adjust to restore equilibrium. since the price elasticity of food demand is low as compared to, say, durable goods, there needs to be a drastic rise in food prices, which is what we are facing today. dear guests, until recently, the common view