On December 10, Central Bank announced the monetary and exchange rate policy for 2010. Along with this, we also learned the inflation target for the following three years jointly set by the government and the Central Bank. Inflation targets for 2010, 2011, and 2012 are 6.5, 5.5, and 5 percent, respectively.

The most striking among these is the 5 percent target for 201. As it pertains to three years after today, we can consider this as the medium term inflation target. In other words, we can say that Central Bank considered that inflation can fall to 5 percent at most. The second striking aspect is: Medium term inflation rate developed countries accept for price stability is around 2 percent. In this context, 5 percent medium term inflation target Turkey set turns out high.

Due to this, Central Bank felt to make a clarification and added a quite long explanation talking about the rationale of this at the end of the relevant report. I should first state that it was a satisfactory explanation. Even before you read it, you get the opinion that inflation cannot fell below 5 percent given the recent developments in inflation. Domestic demand was very weak since 2008 fall; foreign demand came to a halt. Because of these, the economy will contract by 6 percent. What is more, the contraction began in the last quarter of 2008 and pace of growth in the second and third quarter of 2008 were quite low. The average increase in unemployment in the first nine months of 2009 was quite high at 3.9 points. Economic contraction was not unique for Turkey; developed economies also contracted. Moreover, commodity prices dropped significantly.

In a period where all preconditions for a fall in inflation were present; the lowest level of inflation was recorded in October at 5.1 percent. Year end inflation will most probably be higher, close to 6 percent. The only factor preventing a further fall in inflation was the rise in exchange rate. The increase in the foreign exchange basket was around 16 percent compared to last year's average. Even if the increase in exchange rate was lower, year-end inflation would most probably not fall below 5 percent.

The annexed explanation by the Central Bank satisfactorily justifies the 'rough' observations I summarized above. Particularly the recent changes in prices of goods and services which were almost not affected by monetary policy decisions is quite interesting in this sense. Energy, unprocessed food, alcoholic beverages and tobacco, and gold prices have pushed up inflation by 3.7 percent in average since 2004. Moreover, when the trend since 2004 rather than monthly fluctuations are considered, this impact is seen to rise.

In this context, 5 percent inflation target for 2012 is not surprising at all. But now we can ask why 4 percent target was set for 2007 and 2008. This is a relevant question. However, back than the experience I summarized above was absent. That is, back then we had no experience which showed that inflation did not fall below 5 percent in spite of the fact that almost all factors worked together to reduce the rate of inflation.

This commentary was published in Radikal daily on 20.12.2009