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 of 2007.
Despite the significant distance covered in the fight against inflation, price stability has not been achieved yet and there is still a long way to go. Recent inflation developments also confirm this fact. At this point, I would like to summarize the inflation and monetary policy developments of the recent period. The increase 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  2  BIS Review 68/2006  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.