8  BIS central bankers’ speeches  Revised forecasts suggest that credits should grow at a measured and vigorous pace to keep inflation in line with targets over the medium term. To this end, we provide a numerical range for the annual rate of credit growth in order to be more concrete. I would like to underline that these growth rates should not be perceived as strict targets for the CBRT. At this point, I would also like to emphasize that the nominal credit growth consistent with the medium-term inflation target may vary over the years depending on the course of factors such as inflation, growth and the composition of the aggregate demand. As illustrated on the slide, over the next three quarters, inflation may display significant fluctuations mainly due to base effects driven by food prices. Accordingly, annual food inflation is expected to rise in the second quarter, decline in the third quarter, and increase markedly in the last quarter (Chart 15). Comparison of January 2011 and April 2011 Inflation Report Forecasts  Chart 16. Chart 17. Output Gap Forecast  Inflation Forecast  Source: CBRT. Source: TurkStat, CBRT. Comparing our current forecasts with those of the previous reporting period, I would like to reiterate that we revised the initial point of our output gap forecasts upwards due to the more-than-expected increase in the domestic demand in the last quarter of 2010 (Chart 16).
Monetary policy developments and monetary conditions  The mentioned discrepancy between advanced and emerging economies accelerates capital flows into countries, such as Turkey, with strong economic fundamentals and relatively low risk. Rapid credit expansion and widening current account deficit fueled by short-term capital inflows increase risks to financial stability and carry the potential to hamper price stability  BIS central bankers’ speeches  1  over the medium term. This gives rise to adopting different approaches that incorporate financial stability into the monetary policy framework. As you have been following very closely, we have designed and adopted a new policy strategy as of the end of 2010. While our new policy approach maintains the priority of price stability, we also observe financial stability as a supporting objective. In this context, in addition to policy rates, we jointly use complementary tools such as reserve requirement ratios and the interest rate corridor. The primary objective of this new approach is to contain the negative effects of the ongoing global imbalances on the Turkish economy. Now, I would like to summarize the decisions that we have made within the new policy strategy. The downtrend in inflation during the last quarter of 2010 allowed the CBRT to give relatively more weight to financial stability during this period. In this respect, in order to reduce short-term capital inflows, we lowered policy rates on one hand and raised the volatility in short-term interest rates by widening the interest rate corridor on the other hand.