BIS Review 68/2006  3  The first one of these risks is the continuance of the increase in oil and commodity prices. Moreover, continuance of the controlled course of the increase in total demand provided by tight fiscal and monetary policies is a must for preventing a demand-based inflationary pressure. Prices of public goods and services, indirect taxes and the incomes policy should be consistent with inflation targets. Developments in the risk premium, which result from monetary policies of developed countries and are likely to cause fluctuations in global liquidity conditions, also pose risks to the disinflation process. As I have mentioned before, attempts and statements that may damage expectations can also lead to unfavorable effects on the disinflation process. In this framework, relations with the IMF and the European Union are two critical anchors in terms of medium and long-term expectations. Support from international institutions is a significant factor bringing about additional confidence. European Union negotiations for full membership provide support to the national program in the framework of the improvement of the Turkish economy’s investment environment and increase the predictability of the economy in the medium and long term. Uninterrupted implementation of structural reforms is of critical importance. The continuance of the reform process is the only way to sustain and build on the achievements made up to now. Social Security Reform is a significant step in this respect.
However, it can be said that this period of time is much shorter in case of the expectations channel, which is a part of the transmission mechanism and operates in a very effective manner in our economy. At this point, I would like to emphasize that the Turkish economy has entered a normalization process. As a matter of fact, in comparison with previous periods, the banking sector has a more robust structure and fiscal dominance has decreased considerably. As a result of this structure, any measures to be taken regarding the policy instrument should be evaluated in terms of the impacts of the monetary policy on inflation, rather than in view of the likely effects of these measures’ consequences on the above-mentioned areas. In other words, the increase in short-term interest rates, which are the policy instrument, should be evaluated merely as a necessary reaction of monetary policy for achieving the medium-term inflation targets. When the sub-indicators demonstrating the main trends in inflation are analyzed, it is observed that the targets for 2007 and 2008 seem achievable in light of the medium-term outlook as of the present date, as long as the cautious stance in monetary policy is maintained. Certainly, for the course of inflation to follow a path in line with the forecasts of the Bank, certain conditions need to be satisfied. In other words, there are some risks to the sustainability of the disinflation process in the medium-term.