I would like to reiterate that we will not allow these developments to affect medium-term inflation expectations and the medium-term inflation outlook adversely. Indeed, we have already started the necessary monetary tightening to keep inflation under control and to ensure that inflation realizations remain in line with the target set for 2012. Details on this issue can be found in the Inflation Report that I will summarize shortly. Secondly, I will talk about our interest rate policy. After the last Committee meeting, banks’ funding costs from the Central Bank were set within the interest rate corridor, in other words, between 5.75 and 12.5 percent on average, or at a level that the Central Bank considers appropriate. In cases where funding is effected at 12.5 percent, the Central Bank will meet banks’ demand with no upper limit and against eligible collateral. Tightening or easing to be achieved via the funding channel will be implemented even on a daily basis depending on the course of economic and financial developments. In the event that risks to price stability are observed, the Central Bank will allow banks’ overnight borrowing rates to hover around 12.5 percent for some time. Thirdly, I will provide you with some information about our reserve requirement policy. Depending on the outcome of the EU Leaders Summit and the foreign markets’ perception of this outcome, the Central Bank may introduce a limited reduction in the Turkish lira required reserve ratios if deemed necessary.
This has led to an increase in short term inflation forecasts by 0.6 points (Table 1). The assumptions about fiscal policy used for medium-term forecasts were based on the outlook presented in the Medium Term Program (MTP). Therefore, the baseline scenario envisages that the ratio of primary expenditures to GDP would gradually be reduced from 2012, the public debt-to-GDP ratio would continue to fall, and the risk premium would remain broadly unchanged. Moreover, tax adjustments and administered prices are assumed to be consistent with inflation targets and automatic pricing mechanisms. Distinguished Members of the Press, As I have already stated, since the publication of the July Inflation Report, emerging economies have faced rapid capital outflows due to the deteriorating risk appetite. In this respect, excessive depreciation in the Turkish lira has become more evident. This development, coupled with the increase in prices of administered goods, has raised the risk of deterioration in pricing behavior. We responded to these developments strongly by increasing our overnight lending rate markedly in our October meeting (Chart 6). We expect monetary tightening to contain inflationary pressures in the period ahead. However, inflation is forecasted to increase significantly in the short term with the contribution from low base effects in unprocessed food prices.