14  BIS Review 133/2010  I would like to underline that our revised forecast indicates that the monetary tightening required to keep inflation in line with medium-term targets would start later and would be more limited than implied by the previous forecast. Although inflation trend is expected to remain consistent with the medium-term targets and follows a stable path, the exact course of headline inflation until mid-2011 would depend on the base effects driven by the volatile unprocessed food prices in the past year and the tax hikes implemented at the beginning of 2010 (Figure 33). Therefore, in order to help economic agents to better interpret developments in headline inflation, which would increase the effectiveness of expectations management, I would like to provide you with some more information about this issue. Owing to the base effects resulting from the tax hike on tobacco in 2009 and the tax cuts on durable goods in March and April 2009, which began to cease in June 2009, inflation is likely to fall markedly in July 2010. Inflation is expected to rise in August due to the sharp drop a year ago, and decline substantially in the final quarter with the reversal of base effects from food prices. The contribution of tax hikes introduced in early 2010 will have largely disappeared and this will be the primary factor influencing the inflation trend in the first two months of 2011.
However, current inflation expectations for 12 and 24-months ahead hover slightly above year-end targets of 5.5 and 5 percent for 2011 and 2012, respectively. 2. Monetary policy response  After commenting briefly on inflation developments, I would now like to cover the policies pursued by the Central Bank during the last quarter. Anticipating that inflation would decrease sharply following the last quarter of 2008, the Central Bank of Turkey (CBT) focused on alleviating the potentially harsh impact of the global financial crisis on the domestic economy. In this respect, the CBT has delivered sizeable cuts in policy rates, while providing liquidity support to facilitate the smooth operation of credit markets. Accordingly, policy rates have been cut by 1025 basis points since November 2008 (Table 1). Considering the favorable developments in credit markets and the moderate recovery in economic activity, the Monetary Policy Committee (the Committee) ceased policy rate cuts in December 2009. Notwithstanding the rapid increase in inflation during the last quarter of 2009 and the first quarter of 2010, I would like to remind you that the Committee, highlighting the persisting downside risks regarding the global economy and the consistency of core inflation indicators with the medium-term inflation targets, expressed that policy rates would stay at low levels for a long period.