At this point, it is important to ask a counterfactual question: what would the path of inflation have been had the CBRT not reacted? To provide more guidance on this matter, I would like to draw your attention to the chart (Chart 15). The chart depicts accumulated price increases resulting from exchange rates and administered price developments, in the case of no reaction by the CBRT. Accordingly, we estimate that the contribution of these developments to inflation would have reached 6 percentage points, had the CBRT not taken any policy measures. In this scenario, consumer inflation reaches double digits at 10.1 percent, owing mainly to the excessive depreciation of the Turkish lira, also coupled with the effect of the deterioration in inflation expectations (Table 2). Therefore, given the backward looking pricing-behavior in the services sector, inflation would hover at elevated levels for an extended period of time. This would lead to a deterioration in inflation expectations, and risk the hard-earned recent  BIS central bankers’ speeches  9  achievements on the path to price stability. In such a case, bringing inflation back to reasonable levels would be more costly. In order to prevent such adverse developments, the CBRT intervened actively in the foreign exchange market; and in line with its primary objective of price stability, responded boldly by increasing overnight lending rates significantly.
Assuming that the annual rate of credit growth decelerates gradually, and monetary conditions are tightened significantly in the final quarter in line with policy measures taken in October, inflation is expected to be, with 70 percent probability, between 7.8 and 8.8 percent with a mid-point of 8.3 percent at the end of 2011, and between 3.7 and 6.7 percent with a mid-point of 5.2 percent at the end of 2012. Inflation is expected to stabilize around 5 percent in the medium term (Chart 14). I would like to reiterate that any new data or information regarding the inflation outlook might lead to a change in the monetary policy stance. Therefore, assumptions regarding the monetary policy outlook underlying the inflation forecast should not be perceived as a commitment on behalf of the CBRT. In sum, short-term inflation forecasts were revised on the upside mainly due to exchange rate developments and hikes in administered prices. I would like to underscore that these factors reflect a movement in relative prices rather than a permanent increase in inflation, as the monetary tightening envisaged in the last quarter in the context of the CBRT’s recent strong policy reaction will prevent second round effects. 8  BIS central bankers’ speeches  Distinguished Guests, I would like to highlight once more that the recent tightening in the CBRT’s policy stance aims mainly to prevent deterioration in inflation expectations triggered by inflationary pressures from the exchange rate.