Additionally, adjustments in electricity tariffs are forecasted to be made in compliance with this assumption. Assuming that policy rate stays constant for a while and gradually ease thereafter, our forecasts under this scenario suggest that inflation will be 6.1 percent at the end of 2009 and around 4.9 percent at the end of 2010. In sum, monetary policy will be conducted so as to minimize upside deviations from the targets should the upside risks materialize. Downward surprises in food and energy prices, on the other hand, will be perceived as an opportunity to bring inflation back to target in a shorter period than envisaged in our baseline scenario. 12  BIS Review 100/2008  Figure 15: Inflation Forecasts, Baseline and Alternative Scenarios Baseline Senario  End-Year Inflation Targets  Pessimistic Senario  Optimistic Senario  12  Percent  10 8 6 4  2011-II  2011-I  2010-  2010-III  2010-II  2010-I  2009-  2009-III  2009-II  2009-I  2008-  2008-III  2008-II  2008-I  2  Source: CBT. Distinguished Guests, Despite the expected decline in inflation in the medium term, uncertainties exist regarding the degree of inflation persistence. Long-lasting supply shocks have been keeping headline inflation at elevated levels and thus increasing the risk of rising backward-looking schemes in the wage and price setting behavior.
Risks and monetary policy  Distinguished Guests, I would like to dedicate the last part of my speech to the upside and downside risks to inflation and monetary policy in the upcoming period. Uncertainties about food and energy prices still continue. Our baseline scenario is based on quite conservative assumptions for food and energy prices, implying that downside risks on these factors are as apparent as upside risks. In order to enhance the predictability of the monetary policy, in a period when uncertainties pertaining to oil and agricultural commodity prices continue, we deem it to be useful to share with the public the inflation and monetary policy outlook, which is based on alternative scenarios for food and energy prices. In our pessimistic scenario, we assume that food price inflation materializes at 16, 12 and 10 percent in 2008, 2009 and 2010 respectively; whereas oil prices rise to USD 180 at the end of 2008, staying constant thereafter. Additionally, adjustments in electricity tariffs are forecasted to be made in compliance with this assumption. Assuming a gradual monetary tightening during the rest of the year, our forecasts under this scenario suggest that inflation will be 9.1 percent at the end of 2009 and around 7 percent at the end of 2010 (Figure 15). In our optimistic scenario, we assume that food price inflation materializes at 12, 6, and 4 percent respectively, in the 2008-2010 period, whereas oil prices ease to USD 100 at the end of 2008, staying constant thereafter.