The detention of Istanbul Metropolitan Municipality Mayor Ekrem İmamoğlu on March 19 created intense selling pressure in the markets last week. However, due to a series of measures taken and the stabilization of the exchange rate, the volatility in the markets decreased this week. To prevent the increase in the Dollar, reserves worth over 25 billion dollars were sold in 3 days. This figure was disclosed by Central Bank Governor Fatih Karahan himself during a meeting with foreigners. During that meeting, Finance Minister Mehmet Şimşek conveyed the message that there is no permanent damage in inflation. The ultimate goal in the implemented economic program is to reduce inflation and ensure financial stability. To achieve this, it is crucial that the exchange rate does not increase. According to Karahan, the pass-through rate from the exchange rate to inflation is around 20 percent. However, some economists claim that this has reached to 100 percent in recent years. The reason is that the increase in the exchange rate adversely affects pricing behavior. Emre Ekmekçi, the Vice President of the Association of E-Commerce Operators, says that due to the increase in the exchange rate, brands have reduced their campaigns before this holiday. Even a 4 percent increase in USD/TRY created this impact. THE RISE DERIVES FROM FOREIGN OUTFLOW Minister Şimşek expressed during a meeting with investors that the substantial part of the increase in the exchange rate derives from foreign outflow. The estimated effect ratio is around 60 percent foreigners, 30 percent companies, and 10 percent citizens’ demand-based. It is not expected for foreigners to have a sharp increase in the exchange rate from now on. The biggest risk is the tendency of citizens and companies to buy dollars. This is highlighted as one of the risks in the reports published by foreign banks. The Central Bank announces the changes in the exchange deposits of domestic residents every Thursday. Last week, the foreign exchange deposits, excluding the parity effect, increased by 5.9 billion dollars. The increase of 3.2 billion dollars came from legal entities, while 2.7 billion dollars came from real persons buying foreign currency. WILL INFLATION EXPECTATIONS RISE? The increase in the Dollar exchange rate is not the only factor causing inflation to rise. Expectations about inflation also impact the changes in prices. The Central Bank measures the inflation expectations of market professionals, companies, and citizens every month. In March, the inflation expectation of market participants and the real sector improved. Market participants predict a 24.6 percent inflation for the next 12 months, and the real sector expects 41.1 percent inflation. There was a slight increase in households’ expectations. Households believe that inflation will be 59.3 percent in the next 12 months. These data do not reflect the recent developments and the increase in the exchange rate. Probably, there will be an increase in the next month for all 3 sectors. The increase in companies’ inflation expectations leads to them setting higher prices for products. The increase in citizens’ inflation expectations results in them continuing to shop despite high prices. This can create a negative situation for the disflation process. Consequently, both foreign exchange deposits and inflation expectations data will be closely monitored as they indicate the impacts of the current developments on the future.