durmus yilmaz : press conference for the presentation of the inflation report speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the press conference for the presentation of the inflation report, central bank of the republic of turkey, ankara, 31 january 2008. * * * distinguished guests and press members, welcome to the press conference for the presentation of the inflation report that is one of the most important communication tools of the formal inflation targeting regime that we implement. in this conference, i would like to give you a short summary of our evaluations and the central bank ’ s inflation forecasts which appear in the inflation report that will be posted on our website shortly today. 1. an assessment of the year 2007 i would like to start by a general assessment of inflation developments in the year 2007. the monetary tightening exercised since mid - 2006, has been successful in leading to a significant reduction in the underlying inflation. especially the 3. 6 percentage points fall in the services inflation, which confirmed the marked disinflation trend during 2007, was remarkable. the fall in headline inflation, however, was more limited, owing mainly to factors beyond the control of monetary policy, such as developments in energy, food, and administered prices. accordingly, inflation realized as 8. 39 percent at the end of 2007, breaching the upper bound of the uncertainty band of 6 percent. on the other hand, annual cpi inflation excluding food, energy and tobacco products was at 4. 8 percent ( figure1 ). figure 1 : annual cpi inflation and the target path annual inflation cpi excl. food, energy and tobacco target path uncertainty band source : turkstat, cbrt. the course of food prices has been main factor slowing down the disinflation process. a prolonged shortage of rainfall in turkey since autumn 2006 has resulted in low crop yields in 2007, which in turn translated to an adverse supply shock. global developments, such as increasing bio - fuel production, strong global demand for food and consequent rises in agricultural commodity prices, further added to the domestic food inflation through the external trade channel. these factors had an impact not only on unprocessed food such as fresh fruit and vegetables, but also on processed food such as grain and dairy products. accordingly, annual food inflation maintained its high levels, with an end - year figure of 12 percent. hence, food prices became the main factor impeding the disinflation process in 2007,

in some aspects, also been strengthened : all central banks have now adopted a quantification of their price stability objective ; everyone is aware that symmetry in implementing their mandate is crucial ; everyone is putting increased emphasis on communication to impact monetary and financial conditions. what may have changed forever is the way monetary policy operates through a diversity of tools. it is very unlikely that central banks will, in the future, rely solely upon one single instrument : the short - term interest rate. financial frictions will have to be taken into account, especially when looking at the transmission mechanism. furthermore, we now know that the zero lower bound is not simply an intellectual curiosity and may effectively constrain policy making. that means that several instruments, including in the macroprudential field may have to be used simultaneously. liquidity provision will likely play a central role in policymaking in the eurosystem for some time to come. second, i have made the case for an active monetary policy when inflation has reached dangerously low levels. but there is always a risk of expecting too much and “ overburdening ” monetary policy. it should be recalled that monetary policy cannot by itself increase growth. it also, faces “ diminishing returns ”. the longer interest rates are kept at low levels, the greater the risks for financial stability. bis central bankers ’ speeches current easy monetary conditions should be used to create environment conducive to longterm growth. there is a clear message coming out from the last g20 meeting. economic policy should aim at raising the equilibrium interest rate by fostering opportunities for productive investment, modernising infrastructures and improving the quality of public spending. that can only be achieved through broad - based reform in both goods and labour markets. ultimately, only strong and determined action can restore durable growth. the opportunity is there and should not be missed. bis central bankers ’ speeches