The baseline scenario reflects the slowdown in output that has been occurring during the year. It also assumes that investment will moderate further as the investment cycle is completed, consistently with adjustments seen in business surveys and investment plans. Consumption is expected to slow gradually because of the still strong labor market and the relative stability of household saving during the expansionary phase of the cycle. Consumer expectations are less optimistic these past few months and are approaching neutrality, which will help moderate this component of expenditure. So will the slower pace of marginal job creation, particularly salaried work, and the slowdown of real wages. Coupled with this is the depreciation of the real exchange rate which will affect durable consumption. Also, moderating investment will help to take pressure off the labor market. Finally, there is the foreseen reduction in the impulse from abroad (table 2). Inflation is expected to continue to grow steadily to reach 3% during the first half of 2014 and and be stable until the end of the projection horizon, this time the third quarter of 2015. The CPIEFE will take somewhat longer to hit 3%. The underlying assumption is that nominal wages will rise in line with productivity and the inflation target. There is also the methodological assumption that the RER will remain near its recent values. Finally, the baseline scenario uses as a working assumption that the MPR will follow a path similar to the one implicit in expectations surveys available at the closing of this Report (figure 5).

Unlike its peers, the leverage ratios in Turkey stayed at moderate levels  BIS central bankers’ speeches  3  during the period of excess global liquidity, thanks to prudent policies of the Banking Regulatory and Supervision Agency and the Central Bank of Turkey. In fact most of those policies implemented in Turkey since 2002 are incorporated into the Basel III principles, such as countercyclical buffers (banks in Turkey are not permitted to expand unless their ratio is at least four percentage points above the legal minimum) and liquidity ratios (both in local and foreign currency). Debt level of the public sector was also reduced significantly thanks to a quite ambitious fiscal discipline. The real strength of the economy, however, came from the management of foreign exchange risks, which is the most critical aspect of a small, open economy. Thanks to prudent regulations and oversight, the overall FX position of the Turkish banking sector was balanced. Households carried a long position in FX, limiting their exposure to curreny shocks. Although the corporate sector carried a significant FX position, their debt was mainly in long term. All these factors contributed to the resilience of the Turkish economy to the global crisis, which in turn provided ample space to the Central Bank of Turkey to implement front-loaded and aggressive monetary easing without compromising price stability objective. No rescue package was needed to support the banking system. Thus, the government was able to enact modest but still quite effective counter-cyclical fiscal policies in the midst of global turmoil.