Inflation is expected to stabilize around 5 percent in the medium term (Figure 24). Hence, assuming that a limited monetary tightening will bring credit growth rate down to 20–25 percent in 2011, our revised forecasts indicate that inflation would be close to the target by the end of 2011. I would like to highlight that the envisaged monetary tightening in 2011 may be through various combinations of different policy tools. The monetary tightening could be implemented by either required reserve ratios or policy rates, or a combination of both. Moreover, during the tightening process, both instruments could move in either the same or the opposite direction. Yet, it should be emphasized that the baseline scenario envisages the net impact of the policy mix on credits and domestic demand to be on the tightening side. We believe that evaluating our forecasts in comparison with those presented in the previous Report would serve to provide a better understanding of the changes in forecasts. As I have mentioned earlier, the rapid decline in unprocessed Food Prices pulled short-term inflation forecasts down, while the upward revision of oil and other commodity price assumptions drove end-2011 inflation forecasts higher (Figure 25). The output gap has been revised slightly upward for the last quarter of 2010 (Figure 26). Moreover, taking into account the lagged effects of monetary tightening, the output gap is assumed to close slower than what was suggested in the previous report.
I would like to elaborate on these factors to enable a better understanding of the forecasts. The October Inflation Report envisaged food inflation to be 10.5 percent at end-2010, to fall gradually to 7 percent at end-2011 and to remain at these levels throughout the forecast horizon. As I stated at the beginning of my speech, the sharp decline in unprocessed food inflation during the fourth quarter resulted in lower-than-expected food inflation. However, the potential impact of the recent upsurge in agricultural commodity prices on processed food prices led to an upward revision in the assumption for food inflation from 7 percent to 7.5 percent, which had around basis points upside impact on 2011 inflation forecasts (Table 2). BIS central bankers’ speeches  11  In the October Inflation Report, oil prices were assumed to be USD 85 per barrel for 2011 and USD 90 per barrel for 2012 and beyond. Moreover, import prices were assumed to rise gradually over the forecast horizon, increasing by an average percent year-on-year in 2011. Commodity prices have accelerated further since the release of the October Inflation Report due to the ongoing quantitative easing in advanced economies and the strong growth in emerging economies. In this context, in view of the commodity futures prices for the first half of January, we raised our oil price assumption to USD 95 per barrel for 2011 and thereafter (Table 2). Furthermore, again considering the commodity futures prices, we assume that import prices will increase by about 10.9 percent in 2011 (Figure 23).