On the Turkish economy side, this led to appreciation of the Turkish lira against major currencies, which limited the adverse effect of import price hikes on unit costs. In the third quarter of 2009, despite the upward inflationary pressure from tax adjustments to restore fiscal balance, the annual rate of change in consumer prices maintained its downward pace due to declining course of the underlying trend. By the end of the third quarter, the inflation rate continued to remain below the target-consistent-path. Annual CPI Inflation and the Target-Consistent-Path (A nnual P ercentage Change)  12 10 8 6 4 2  Annual CP I Inflatio n Target Unc ertainty Band  0  Source: TURKSTAT, CBRT. 33. In the last quarter of 2009, in line with our projections, both domestic and external demand, one of the factors that affect the underlying inflation trend, maintained their pace of moderate recovery, and resource utilization in the economy continued to remain low. Yet, inflation was up by 1 percentage point from October Inflation Report projections due to the highest increase in unprocessed food prices of the recent past. Consequently, inflation remained slightly below the target at end-2009 with 6.53 percent, yet remained within the uncertainty band. 34. An analysis of inflation developments in 2009 by subcategories suggests that annual inflation slowed down in all main categories excluding food and energy for which tax adjustments were effective. Although food price inflation remained low relative to recent years, among all subcategories, the biggest contributor to overall inflation has been food prices.

Consequently, particular attention must be paid to the fiscal policy stance and to monetary and financial conditions. The year 2001 saw the attainment of a balanced budget, without the slowdown in the Spanish economy preventing strict compliance with the commitments made under the Stability Programme, consistent with the requirements of the Stability and Growth Pact. Last year, moreover, new fiscal discipline measures were adopted which will contribute to maintaining sound public finances in the medium term. I refer here to the budgetary stability legislation and to the new regional government financing arrangements, which increase the degree of fiscal co-responsibility of the regional governments under the transparency requirements demanded of general government. I have already mentioned that monetary and financial conditions in the Spanish economy were more generous than in the rest of the euro area, although the significance of this difference lessened as demand lost momentum. The credit aggregates grew at high rates for the third year running. That said, they did slow during the year, in step with cyclical developments, although this remains insufficient. The growth of financing to Spanish households and corporations translated last year into a fresh increase in this sector’s debt as a percentage of GDP, with the rise in lending to households for house purchases proving particularly notable. The greater ease with which the private sector has been able to finance its spending decisions has contributed to limiting the depth of the ongoing cyclical slowdown, but at the expense of incurring high debt levels.