Esteemed participants, In terms of the structural transformation programs, financial sector, owing to its significance, is the sector that is most and fastest affected from the process, as well as being the leading sector in terms of supporting the process. Accordingly, further steps need to be taken in this sector in the process of falling inflation. Dear audience, The third factor I will be conveying to you today within the context of the effects of falling inflation on the economy is that, together with falling and foreseeable inflation, prices resume their signaling task in the economy and thus their roles as indicators in the allocation of resources. Departing from the example of Turkey, as we all know from the past experience of chronic inflation, consumers used to be inclined to make less price and quality controls, and attach less significance to diversity in their choices of goods. Producers on the other hand, used to set their profit margins freely to a large extent, paying little attention to their pricing, the costs and productivity. They also showed little interest in making investments for increasing the diversity of their products by adding them new ones. As a result of this structure, the quality of production declined in time, global competitiveness of our country weakened and integration with the world economy was delayed. Nevertheless, with the absolute as well as the relative prices resuming their signaling task following the decline in inflation, the behavior patterns of producers and consumers in Turkey began to change.
As a matter of fact, the pass-through effect of exchange rate movements on prices has been weakening worldwide, in environments where price stability has been ensured thanks to highly reliable monetary policies, attributable to the facts that pricing in domestic currency is widespread, and owing to low and stable inflation, losses of value in the domestic currency are perceived as temporary and firms resort to price adjustments less frequently. At this point I would like to clarify one issue on the exchange rate policy of the Central Bank. The Central Bank has no policy towards keeping the Turkish lira overvalued. As always mentioned from the beginning of the implementation of the floating exchange rate regime, exchange rates are determined under the supply and demand conditions in the market. In case of excessive volatility in both directions, the Central Bank intervenes or if there is an excess foreign exchange supply Central Bank holds FX buying auctions to increase foreign exchange reserves. So we should keep in mind that in the current design of the monetary policy, with the floating exchange rate regime, level of foreign exchange rates is determined according to the developments in economy, exogenous shocks, expectations and volatility in risk premium as a result of all these. Dear participants, I would like to briefly mention what the economy of our country can gain if the main goal, which is price stability, is accomplished after the disinflation process.