4  BIS Review 103/2009  Figure 7: Special CPI Aggregates I and I* (Annual Percentage Change) 9 8 7 6 5 4 3 SCA-I  2  SCA-I*  1 0609  0409  0209  1208  1008  0808  0608  0408  0208  1207  1007  0807  0607  0  I*: Tax adjustments corrected SCA-I. Source: ISE, CBT. Parallel to these developments, while the fall in near-term inflation expectations became more pronounced, medium-term expectations have posted a limited decline and the expectations curve has flattened over the last three months (Figure 8 and 9). Currently, expectations for end-2009 are anchored at 6.09 percent, well below the target. On the other hand, end-2010 inflation expectations, calculated by averaging inflation expectations for 12and 24-months ahead remain consistent with the target at 6.5 percent. Figure 8: 12- and 24-Month Ahead CPI Figure 9: Inflation Expectations Curve* Expectations * (Annual Percentage Change) (Annual Percentage Change) 10  8.0  9  7.5  8  July April Inflation Target  7.0 6.59  7 6  6.40  5.5  12 month 24 month  *CBT Business Tendency Survey results from the second survey period Source: CBT.
However, when the maturity composition of borrowing, the level of interest rates and the depth of financial markets are taken into account, it is observed that the fiscal space is not broad enough for countercyclical fiscal policies. Therefore, backing up the short-term increase in budget deficit with a medium-term program ensuring the sustainability of debt dynamics is crucial for maintaining our risk premium at relatively low levels. Accordingly, domestic perceptions regarding public finance are very important for the monetary policy strategy to be implemented in the medium-term, especially after 2011. The global crisis has raised awareness as to the resilience of our financial system and helped risk indicators to perform better compared to other developing countries and enabled a fast ratecut cycle. Thus, single-digits were finally achieved in short-term interest rates after many years. Meanwhile, the level of medium and long-term market interest rates still remain elevated. The present conjuncture offers an important opportunity to achieve and maintain single digits in market interest rates throughout the forecast horizon of three years. Achieving and maintaining single digits in medium and long-term market interest rates will depend on establishing fiscal discipline. The introduction of a satisfactory perspective for fiscal discipline in the upcoming period would not only decrease the risk premium but would also help to  18  BIS Review 103/2009  keep policy rates at low levels for an extended period of time.