Indeed, the fact that the risk premium indicators in many emerging economies including Turkey are below pre-crisis levels, and the consequent upgrades by credit rating agencies indicate the permanent change in risk sentiment for these countries. 12. As a result of capital inflows, emerging market currencies appreciated and asset prices rose sharply. Furthermore, capital inflows in emerging economies raised concerns over financial stability by fuelling domestic demand and thus causing rapid credit growth. 13. Under these circumstances, central banks of emerging economies focused on containing upside risks on inflation amid the strong rise in domestic demand as well as limiting financial risks due to massive capital flows. Accordingly, many central banks of emerging economies withdrew the liquidity measures adopted during the crisis and embarked on monetary tightening in 2010. Meanwhile, central banks of emerging economies took additional measures against financial and macro financial risks such as excessive credit growth due to accelerated capital inflows, widening current account deficits and the short maturity of the foreign capital. Accordingly, in addition to using policy rates, they opted for a tighter monetary policy stance through the active use of alternative instruments such as required reserve ratios, reserve accumulation and capital controls. 4  BIS central bankers’ speeches  14. The monetary tightening in emerging economies through policy rates and alternative instruments is expected to continue in the upcoming period. Meanwhile, advanced economies are expected to end their easing measures in 2011 and to start normalizing policy.

Core inflation indicators remained low and stable as unemployment rates and capacity utilization rates hovered below pre-crisis levels. Thus, inflation came down to 6.4 percent by the end of 2010, almost reaching the year-end inflation target of 6.5 percent. With the downward revision in food prices, the decline in inflation continued in the first quarter of 2011, and inflation rate was down to 3.99 percent in March 2011. BIS central bankers’ speeches  11  34. Core inflation indicator SCA-H (consumer price index excluding energy, unprocessed food, alcoholic beverages, tobacco and gold) increased 3.49 percent year-onyear while SCA-I (SCA-H excluding processed food) registered an all-time year-end low of 2.99 percent. In the first quarter of 2011, despite a slight upward movement, the annual rate of increase in core inflation indicators remained relatively low. 35. Although year-end inflation expectations fluctuated due to the volatile course of food prices throughout 2010, medium-term expectations remained basically unchanged. As of the first quarter of 2011, the 24-month ahead inflation expectation stands at 6.29 percent, hovering slightly above our medium-term target of 5 percent. 12  BIS central bankers’ speeches  36. Inflation may rise in the short term due to lagged effects of oil prices and base effect. I would hereby like to remind you that we will be more extensively providing the public with updated evaluations and forecasts on the medium-term inflation outlook along with possible risks and policy measures, in the Inflation Report to be published on April 28, 2011. Distinguished Guests, 37.