Revisions to Growth Rate Forecasts in Advanced and Emerging Economies* (Percent, GDP-Weighted Average)  * Dashed lines show the forecasts using the expectation figures in the previous quarter while the dotted lines show the revised forecasts using the updated expectation figures. Advanced Economies: U.S.A., EU, and Japan. Emerging Economies: China, India, Brazil, South Korea, Mexico, Russia, Turkey, Poland, Indonesia, South Africa, Thailand, Malaysia, Israel, Czech Republic, Hungary, Colombia, Philippines. Source: Consensus Forecasts, CBRT. 1. Monetary Policy Developments and Monetary Conditions  The Central Bank of the Republic of Turkey (CBRT) has aimed at engineering the economy gradually towards a more balanced growth composition against the macro financial risks that aggravated in the first half of 2011. Accordingly, with the support of other institutions, necessary measures were taken to bring loan growth rates to reasonable levels. Furthermore, policies were geared towards preventing exchange rates from moving away from economic fundamentals excessively on either side (Charts 2 and 3). 2  BIS central bankers’ speeches  Chart 2. Chart 3. TL and Emerging Market Currencies*  Loan Growth Rate* (13-Week Moving Average, Annualized, Percent)  (Against the USD, Value of 01.10.2010 = 1)  * Average of emerging market currencies including Brazil, Chile, Czech Republic, Hungary, Mexico, Poland, South Africa, Indonesia, South Korea and Colombia, against USD. Increases denote depreciation of the currency. *Adjusted for the exchange rate effect. Source: CBRT. Source: Bloomberg, CBRT. Data released for 2011 point that the desired rebalancing process in the economy has already started.

Inflation and Monetary Policy Outlook  Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. When forming our forecasts, we assumed that the tight monetary policy stance will be sustained for a while; and consequently, annualized loan growth rate will hover around 15 percent and the Turkish lira will display a mild appreciation trend. Accordingly, inflation is expected to be, with 70 percent probability, between 5.1 and 7.9 percent with a mid-point of 6.5 percent at the end of 2012, and between 3.3 and 6.9 percent with a mid-point of 5.1 percent at the end of 2013. We expect inflation to stabilize around 5 percent in the medium term (Chart 17). Chart 17. Inflation and Output Gap Forecasts  * Shaded region indicates the 70 percent confidence interval for the forecast. Overall, although demand and cost conditions have not changed notably since the publication of the October Report, we revised our inflation forecasts for end-2012 upwards due to higher initial point (the initial point referring to the latest inflation data before the forecast period) resulting from higher-than-expected inflation during the past three months. As elaborated on in the Report as well, cumulative increases in the exchange rate and commodity prices coupled with soaring unprocessed food prices and the developments in administered prices pushed inflation to high levels in 2011. We estimate that inflation will remain flat in the first quarter and exhibit a gradual downtrend starting from the second quarter (Chart 17).