6  BIS Review 36/2005  Graph 5: Risk Premium and Real Interest Rates  1000  35  900  30  800  25  700 600  20  500 15  400 300  10  200  Risk Premium (JPMorgan) Real Interest (Calculated w ith inflation expectations)  100  5  Mar-05  Jan-05  Nov-04  Sep-04  Jul-04  May-04  Mar-04  Jan-04  Nov-03  Sep-03  Jul-03  May-03  Mar-03  Jan-03  Nov-02  Sep-02  Jul-02  May-02  Mar-02  0 Jan-02  0  Source: CBRT, JP Morgan. Graph 6: CBRT Interest Rates and Secondary Market Nominal Interest Rates 90 ISE T-Bill and Bond Market Interest Ratescompound  80  CBT Overnight Interest Rates  70  (%)  60 50 40 30  3/2/05  1/2/05  11/2/04  9/2/04  7/2/04  5/2/04  3/2/04  1/2/04  11/2/03  9/2/03  7/2/03  5/2/03  3/2/03  1/2/03  11/2/02  9/2/02  7/2/02  5/2/02  3/2/02  10  1/2/02  20  Source: CBRT, ISE. At this point, within the scope of the changing dynamics of inflation, I would like to talk about the passthrough effect of the exchange rates on inflation, which is quite significant not only in terms of the determinants of inflation, but also the current exchange rate regime.
Besides, there is a persistent and visible recovery in inflation dynamics, and thus the inflation inertia has, to a great extent, been. When we consider where we are after four years of fighting inflation following the crisis, we see that CPI inflation, which was 73.2 percent by January 2002, remained below the end year targets for three consecutive years, declining to single digit figures; annual CPI is realized as 7.94 percent in March 2005. The total decline in inflation during this period was more than 65 percent. This favorable development was apparent in the expectations as well. While the reliability difference, which is the difference between target inflation and inflation expectations, was 13.3 point at the beginning of 2002, it dropped to 0.4 points at the beginning of 2005. As of today, according to the results of the survey of expectations of the Central Bank of the Republic of Turkey, the year-end inflation expectation dropped to 7.5 percent. This figure is below the official target of 8 percent. As well as being a concrete indication of the fact that the inflation inertia has been broken to a great extent, this improvement in inflation expectations is clear evidence of the increased confidence in monetary policy. Moreover, this situation shows that the inflation target will be a nominal anchor for economic units in their future decisions.