High and volatile inflation causes lenders like banks and other financial institutions to demand a higher fixed interest rate on loans to compensate for the risk that inflation will move around, thus raising  2  the cost of finance for investment. At the same time, financial institutions need to offer higher nominal and real interest rates to encourage savers to deposit their money to mitigate the risk of high and volatile inflation eroding the real value of their savings. High and volatile inflation increases the margin between lending rates and deposits, and this high cost of financial intermediation penalises both savers and borrowers. High and volatile inflation encourages workers to bargain for higher wages. High and volatile inflation also prompts producers and sellers in the economy to add higher markups in pricing of goods and services. The combined result of this self-fulfilling cycle will be lower economic growth and higher current account deficits, depleting reserves and volatile exchange rates, and the country will end up with a commercial capitalist class of buyers and sellers of imported goods, or a class of middlemen! Then the question is, what is the appropriate level of low and stable inflation, which will result in more desirable outcomes? Most advanced economies set their inflation target in the low single digits around 2 per cent. For example, the United States and the United Kingdom desire to maintain inflation at around 2 per cent, while in the Eurozone it is below but close to 2 per cent.
At this point we see an improvement in the global growth outlook and an increase in international commodity prices on the back of positive developments in the vaccination process, in addition to expansionary policies. However, despite the ongoing vaccination efforts, the ongoing uncertainties regarding the vaccination process and the course of the pandemic keep the risks to the global economy alive. Distinguished Guests, At my first General Assembly meeting, let me briefly share with you some important issues regarding the monetary policy. Under the duties and powers set forth by law and in line with its main objective of achieving a permanent fall in inflation, the Central Bank of the Republic of Turkey will continue to use the monetary policy tools effectively. We are strictly committed to the medium-term inflation target of 5%, defined as price stability and set jointly with the Government. We are going to use the monetary policy tools appropriately to achieve this target. I would like to underline that we are determined to bring inflation down to 5% in 2023 and keep it there permanently, consistent with the medium-term framework we set out in the January Inflation Report. I am aware that the low inflation environment that we target is a prerequisite for sustainable economic growth as well as employment growth. We will remain determined and resolute to reach this target with our corporate capacity, strong analytical capability and sense of responsibility. The Central Bank will continue to use all available instruments independently and effectively in pursuit of its primary objective.