In the meantime, as the inflation expectations indicate figures above the medium-term target of 4 percent points, we think that there are many things to do towards disinflation. The Central Bank, not being content with what has been achieved so far, will continue to further increase the efficiency in expectations management in forthcoming periods. The rest of this text provides the general framework of the monetary and exchange rate policy to be implemented in 2008. The first part addresses the strategic framework of the monetary policy, while the second part explains the exchange rate policy, foreign exchange auctions and guidelines for liquidity management. BIS Review 4/2008  1  Inflation targets Inflation targets have been set as “point target” since 2006. The target has been defined as the end-year Consumer Price Index (CPI) inflation calculated by the annual percentage change of the Consumer Price Index (CPI) and the target horizon, has been set as 3 years in line with 3-year budget implementation. The Central Bank continues this practice in 2008 as well. By considering the structural transformation of the economy, convergence process to the developed countries and the pricing behavior that remained from high inflationary period, a target of 4 percent has been considered appropriate for the medium-term as agreed with the government. Therefore, inflation targets for 2008 and 2009, which were previously announced as 4 percent, are maintained and the inflation target for 2010 has also been set as 4 percent.
In order to avoid the negative impacts of such a situation, the Central Bank could lower its borrowing and lending interest rates – provided that the inflation outlook is stable – so as to encounter the pressure created by liquidity shortage on overnight interest rates. However, such an interest rate cut would only mean a technical arrangement stemming from the change in liquidity conditions. Therefore, such a move should not be perceived as loosening of monetary policy. The Central Bank does not foresee any significant changes in the general framework of the liquidity management for 2008. Accordingly, 2008 liquidity management strategy will be as follows: i)  The Central Bank will continue to announce overnight borrowing and lending rates between 10:00-12:00 and 13:00-16:00 in the Interbank Money Market within the CBRT. In case of a liquidity shortage during the day, banks will be able to borrow at the Central Bank’s lending rate against collateral within their limits. In the event of a fall in interest rates due to increasing liquidity, banks will be able to lend New Turkish Lira to the Central Bank at the Central Bank’s borrowing rate without any limit. ii)  The Central Bank extended the transaction hours of Late Liquidity Window Facility from 16:00-16:30 to 16:00-17:00 and on the last working day of the required reserve provision to 16:00-17:15 as of July 9, 2007 in order to increase the flexibility and effectiveness of the liquidity management of banks.