Our tight monetary policy stance since October prevents a deterioration in the price setting behavior by keeping inflation expectations under control. Thus, we expect that inflation will follow a downward trend as the accumulated effects of the temporary price movements on annual inflation gradually fade away. Thus, we estimate that inflation will display a notable decline particularly in the last quarter of 2012. Before moving on to the risks regarding the inflation outlook, there is a particular subject I would like to touch upon. As you might have noticed, I have given an inflation forecast that exceeds our end-year inflation target of 5 percent. This is because we think that pulling inflation towards the target by end-2012 would prove to be quite costly. Reducing inflation from the current level of 10.45 percent to 5-percent-target within 12 months would lead to unfavorable fluctuations in economic activity; accordingly we think that it is more reasonable to bring inflation back to the target in one and a half year. Thus, our baseline scenario envisages inflation to reach the target of 5 percent by mid-2013 (Chart 17). However, the target might be attained by the end of 2012, should the risk appetite improve markedly in the forthcoming period and the capital flows towards emerging economies re-accelerate, leading to a stronger appreciation of the Turkish lira than assumed in our baseline scenario.
Also, there is a box that scrutinizes the steps taken to solve the debt problem in the euro area, which points out to the role of structural problems such as the marked divergence in member countries’ competitiveness in hindering stable growth in the euro area. There is also a box exploring the rebalancing process in domestic and external demand thanks to the policies implemented last year. Titles of the boxes are shown on the slide. All of these boxes include important analyses. They will be published on our web-site shortly and I strongly recommend that you read them. Considering the ongoing major role of the developments in the global economy on our policies, I would like to start with the global economic outlook. Since the publication of the October 2011 Inflation Report, concerns over sovereign debt sustainability across the euro area have continued to weigh on the global economic outlook despite the implementation of various policy measures. Growth forecasts were revised downwards at a global scale particularly in the euro area economies (Chart 1). Thus, perceptions for a further delay in the normalization of monetary policy in advanced economies grew stronger. Notwithstanding a relative improvement in the risk appetite as of the onset of 2012, uncertainties regarding the solution of euro area problems persist. Coupled with the increased risk of contagion, this feeds into the fragility in global financial markets, highlighting the significance of a flexible monetary policy framework. BIS central bankers’ speeches  1  Chart 1.