Moreover, in view of the improved international liquidity conditions and the increase in foreign exchange liquidity of the banking system, our Bank has terminated its intermediary role in the Foreign Exchange Deposit Market as of October 15, 2010. In addition, the maturity of the foreign exchange deposits borrowed within the pre-determined borrowing limits by banks from the CBRT was reduced to one week, as was the case before October 2008. Distinguished Guests, 43. The quantitative easing adopted in the last quarter of 2010 by some major central banks and the consequent boost in capital flows to emerging markets have necessitated significant changes to our monetary policy strategy. Short-term capital inflows feeding the divergence between domestic and external demand caused current account deficit to widen rapidly, thus necessitating macroprudential measures. Hence, we jointly use liquidity management facilities and reserve requirements as well as policy rates in order to achieve price stability and financial stability. 14  BIS central bankers’ speeches  44. In line with the new policy design, the TL required reserve ratio was raised by 0.50 points each in September and November to 6 percent. Additionally, in order to more effectively use the required reserve ratio as a tool to contain macroeconomic and financial risks, interest payments on TL reserve requirements was terminated in September. 45. Due to the accelerated capital inflows, our Bank reduced its overnight borrowing rate from 5.75 percent to 1.50 percent in November, and increased the lending rate by 0.25 points to 9 percent. Late liquidity window rates were accordingly revised.

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.