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 second issue of the inflation report, central bank of the republic of turkey, ankara, 30 april 2008. * * * distinguished guests and members of the press, welcome to the press conference for the presentation of the second issue of the 2008 inflation report, one of the most important communication tools of the full fledged inflation targeting regime that we have been implementing. in this conference, i would like to give you a short summary of our evaluations and the central bank ’ s inflation forecasts in the inflation report which will be posted on our website later today. 1. inflation developments dear members of the press, i would like to start with a general assessment of inflation developments. the monetary tightening exercised since mid - 2006 has been successful in achieving a significant reduction in underlying inflation. the fall in headline inflation, however, has been more limited, owing mainly to factors largely beyond the control of monetary policy, such as developments in food, energy, and administered prices. consumer prices rose by 3. 1 percent in the first quarter of 2008 and annual inflation reached 9. 15 percent ( figure 1 ). thus, as of march, annual inflation exceeded the upper limit of the uncertainty band, which was 9. 1. figure 1 : annual cpi inflation and target path 12 / 08 09 / 08 06 / 08 03 / 08 12 / 07 09 / 07 06 / 07 03 / 07 12 / 06 09 / 06 06 / 06 03 / 06 12 / 05 annual cpi inflation target path uncertainty band source : turkstat, cbt. prolonged increases in food, energy and commodity prices have recently led to upward pressure on headline inflation and in turn to upward revisions in inflation forecasts in many countries across the world. turkey is not an exception in this regard, as the deviations of inflation from our forecasts can be mostly attributed to these factors. for instance, our forecasts in the october 2006 inflation report suggested that inflation would converge to the 4 percent target at the end of the first quarter of 2008. the forecast was based on a scenario in which food inflation moderated to levels comparable with medium term targets and oil prices remained stable at 60 usd per barrel. however, oil prices continued to rise and averaged around 100 usd per barrel in the first quarter of 2008. moreover, annual food price

committee meeting. finally, it may be useful to note that our medium - term projections assume that government expenditures will evolve in line with the official projections and that there will be no further increases in indirect taxes or any administered price adjustments. any deviation from this assumption may alter the outlook for inflation and monetary policy. distinguished guests and members of the press, inflation targets have been breached by a significant margin in the past two years as a result of exceptionally persistent supply shocks, and there is a considerable chance that the shocks are likely to stay for a while. besides, the ongoing uncertainty resulting from the global economy has been increasing the risks related to the second round effects of these supply shocks. our revised projections incorporating the latest developments suggest that in 2008 and 2009 inflation is likely to materialize at higher levels than 4 percent. in light of these evaluations, economic agents need reference values in order to establish inflation expectations in the short term. these projections, presented by the central bank, are prepared to meet this need. our projections should be evaluated as the intermediate indicators to be taken as a reference on the way to the 4 percent target. therefore, we envisage a framework in which inflation forecasts serve as an anchor in the short term, while 4 percent targets continue to be the medium term anchor. the accurate comprehension of this framework by the public, thus mapping out their economic plans accordingly will enhance the efficiency of expectations management. distinguished guests, once more i would like to underline that extending the horizon within which inflation converges to the target of 4 percent does not mean that monetary policy will be looser in the forthcoming period. on the contrary, the presented inflation forecasts are based on a tighter monetary policy stance compared to the previous period. monetary policy will be more responsive to bad news than good news in the period ahead. this approach reflects our firm commitment to attaining price stability. i would like to stress that prudent monetary policy is a necessary but not a sufficient condition in itself for attaining price stability. the support from fiscal policy and structural reforms are also critical in this respect. sound fiscal policy has been one of the main factors in driving inflation down to single digits. the role of fiscal policy will continue to be critical on the road to price stability. preserving the resilience of the economy, especially under current conditions, requires the continuation of fiscal discipline and structural reforms. in this respect, the european union accession process and the implementation of structural reforms envisaged in the economic program remain to be