in inflation in the first quarter of the year was an expected development, which has been stated in the bank ’ s reports since january. in april and may, the increase in inflation was above the expected level due to unforeseen developments in seasonal pricing behaviors. compared to march, consumer prices increased by 1. 34 percent and 1. 88 percent in april and may, respectively. as of may, annual inflation became 9. 86 percent, which is obviously above the target path. in may, the direct effects of exchange rate movements on inflation started to be observed through the channels of fuel oil, gold and durable goods. during this period, the upward pressure exerted by the depreciation in the new turkish lira on inflation reached 0. 5 points. adding the exogenous movements in gold and oil prices, the total impact amounts to 0. 65 point. in other words, some of the direct effects of exchange rate movements on prices became evident in may. however, these effects are expected to be high in june, too. in the light of evaluations made in this respect, annual inflation figures may increase a little more for a temporary period of time in the upcoming months, due to the recent exchange rate movements observed after the fluctuations in financial markets. we foresee that these developments will mostly affect the short term, and the disinflation process will not be interrupted as long as the monetary and fiscal discipline continues in the medium - term. nevertheless, we have experienced many times that short - term developments might affect longer - term variables via expectations, due to past habits and the short - term perspective in turkey. as a matter of fact, we observe that short - term developments seem likely to affect the medium - term inflation expectations and pricing behaviors recently. in order to prevent the said short - term developments from creating permanent impacts on pricing behaviors and to maintain consistency between the mediumterm inflation trend and the targets, we have held an extra meeting and increased short - term borrowing interest rates to 15 percent from 13. 25 percent. in this respect, the outlook we take as a basis is the one in which a relative slowdown is observed in domestic demand, the increase in unit costs stops and inflation enters a downward trend again in the coming months. in light of information currently available, it can be said that inflation will be above the point target in end - 2006. in this framework, we have adopted a policy perspective in which inflation will come close to the target towards the end

vigilance over adherence to these norms goes hand - in - hand with greater autonomy. recent evidence of transgression of prudential guidelines by a few banks has raised the issue of the audit and supervisory functions of boards. as we move towards a more deregulated financial regime, these functions have to be transferred from either the government or the reserve bank to bank boards. this imposes a greater responsibility and accountability on the bank management. it is in this context that a consultative group of directors of select banks and other experts has been set up to recommend measures to strengthen the internal supervisory role of boards. the objective is to obtain a feedback on how boards function vis - a - vis compliance with prudential norms, transparency and disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for ensuring management discipline. several other initiatives in improving the supervisory function have been undertaken, including a prudential supervisory reporting system for financial institutions, improvements in procedures for financial inspection, sensitising the general public for better regulation of the activities of nbfcs and enactment of appropriate legislation to protect depositor interests in some states. major legal reforms have been initiated in areas such as security laws, the negotiable instruments act, bank frauds and the regulatory framework of banking. the reserve bank has also accepted the principle of transfer of ownership to the government in respect of some financial institutions in view of the conflict of interest that may arise in the conduct of its supervisory function. it is expected that these initiatives will pave the way for an efficient, and risk - based supervisory environment in india. technology in banking nobel laureate robert solow had once remarked that computers are seen everywhere excepting in productivity statistics. more recent developments have shown how far this state of affairs has changed. innovation in technology and worldwide revolution in information and communication technology ( ict ) have emerged as dynamic sources of productivity growth. the relationship between it and banking is fundamentally symbiotic. in the banking sector, it can reduce costs, increase volumes, and facilitate customised products ; similarly, it requires banking and financial services to facilitate its growth. as far as the banking system is concerned, the payment system is perhaps the most important mechanism through which such interactive dynamics gets manifested. recognising the importance of payments and settlement systems in the economy, we have embarked on technology based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products such as the computerised