BIS central bankers’ speeches  3  A more expansionary monetary policy gives better target fulfilment My view of monetary policy implies that at each monetary policy meeting one should choose the repo-rate path that with the corresponding forecasts for inflation and unemployment best stabilises inflation around the target and unemployment around a long-run sustainable rate. It should not be the case that a lower or higher repo-rate path leads to better target fulfilment for both inflation and unemployment. In other words, it should not be the case that inflation and the inflation forecast are below the target while unemployment and the unemployment forecast are above a long-run sustainable rate. Based on Norwegian central bank deputy governor Qvigstad’s (2005) criteria for a good repo-rate path, this can be worded as: For monetary policy to be well-balanced, the inflation gap (the gap between inflation and the target) and the unemployment gap (the gap between the unemployment rate and the longrun sustainable unemployment rate) should have the same sign. My view is also that the target fulfilment for inflation and unemployment during the entire forecast period is what is important, not just the target fulfilment at the end of the forecast period. For an unemployed person there is a major difference between getting a job in one or two years’ time and getting one in three years’ time.
This is attributable to hikes in unprocessed food prices driven by supply-side shocks. 12  BIS Review 68/2010  CPI by Subcategories  Contribution to CPI Inflation in 2009  (Annual Percentage Change)  (Percentage Point)  25  Go ods exc l. Food and Energy 29%  2006 2007  20  2008  Foo d 40%  2009 15  Energy 11%  10  Serv ices 20%  5  0 Food  Energy  Goo ds e xcl. Fo od a nd En ergy  Services  Source: TURKSTAT, CBRT. 35. Source: TURKSTAT, CBRT. Despite having followed a volatile course during periods when temporary tax adjustments were effective, core inflation, which is useful for predicting underlying inflation, had a remarkable downtrend consistent with medium-term targets throughout 2009. Core Inflation Indicators and CPI Inflation (Annual Percentage Change)  12 10 8 6 4 2 0  CPI  SCA-H  SCA -I  Source: TURKSTAT, CBRT. 36. Recent data releases indicate that the pace of recovery in economic activity continues. Domestic demand rises gradually as the lagged effects of monetary policy implementations become evident, whereas, uncertainties regarding external demand persist. Accordingly, we expect that after following a volatile course significantly above the target for some period, inflation will be back on a downtrend by the phasing out of temporary effects as of the last quarter of the year and return to target-consistent levels as of early 2011.