Pre-requisites to a stable Islamic financial system  Despite a more challenging environment, the development of Islamic finance as a viable form of financial intermediation has moved forward. It is while Islamic finance is still at its early stage of development that the opportunity has been taken to strengthen its foundations and put in place the pre-requisites that will pave the way for its development and safeguard the stability of the system. Not only has closer attention been given to the supervisory, regulatory and legal dimension but also to the development of the financial infrastructure and the markets as well to institutional development. In essence, the prudential regulatory design has been complemented by concurrent efforts to develop Islamic financial markets, the Islamic institutions and the financial instruments. Allow me to highlight the key areas that are important to this objective. First, effective regulatory and supervisory framework The hallmark of a well-developed financial infrastructure is an effective legal, regulatory and supervisory framework which would underpin the stability of the financial system. The regulatory and supervisory function is an indispensable and vital component of the financial infrastructure. For the Islamic financial system, this framework also needs to be consistent with the requirements of the Shariah principles, including the establishment of a Shariah council, which provide assurance that the strategic direction, the formulation of policies and the conduct of financial transactions are in compliance with the Shariah principles.

First, I will summarize the recent inflation developments, and then compare the short term forecasts in the October Inflation Report with the actual inflation data regarding the fourth quarter of 2011. There were a few developments in the interreporting period which led inflation to deviate significantly from October forecasts. More-than-envisaged increases in unprocessed food prices were an important cause of this deviation. The ongoing depreciation in the Turkish lira amid the deterioration in the risk appetite was another factor leading to a deviation in short-term forecasts (Chart 8). BIS central bankers’ speeches  5  Chart 8. October 2011 Inflation Forecasts and Realizations  * Shaded region indicates the 70 percent confidence interval for the forecast. Owing to the lagged effects of the exchange rate pass-through, core inflation indicators remained at elevated levels during the final quarter (Chart 9). This mainly stemmed from soaring core goods prices, while the moderate course of the underlying trend of services inflation indicated a benign outlook in terms of second round effects (Chart 10). Chart 9. Chart 10. Core Inflation Indicators SCA-H and SCA-I  Prices of Core Goods and Services  (Seasonally Adjusted, 3-Month Average, Annual Percent Change)  Source: TurkStat, CBRT. (Seasonally Adjusted, 3-Month Average, Annual Percent Change)  Source: TurkStat, CBRT. We see that economic activity remained robust in the second half of 2011, despite a slight deceleration. Gross Domestic Product (GDP) data pointed that domestic demand proved stronger in the third quarter of 2011 compared to the outlook presented in the October Inflation Report (Chart 11).