It is thanks to the fiscal discipline already established that countercyclical policy could be implemented in this period. Tax arrangements along with hikes in commodity prices that were put into effect at the beginning of the year played a significant role in the increase of inflation in the recent period. The hike in annual inflation mainly emanated from the co-emergence of many temporary factors rather than general pricing behavior. Meanwhile, the main inflation indicators remained consistent with medium-term targets. Moreover, the annual rate of increase in services prices and the inflation diffusion index saw historically low levels. These observations indicate that the increase in inflation in the last quarter of 2009 is mainly due to temporary developments, and to factors beyond the immediate control of monetary policy, rather than the main components of inflation. We consider the possible effect of inflation hikes on expectations due to the base effect a significant risk factor in forthcoming months. However, under the assumption that resource utilization in the economy will remain at low levels for an extended period, employment and credit conditions will not allow a strong expansion in consumption demand and fiscal policy will gradually generate a contractionary effect, we believe that the effect of price increases emanating from one-time shocks on general pricing behavior will be limited. It is important that economic units accurately perceive the temporary quality of the said factors and that medium and long term expectations do not deteriorate. The CBT are vigilant on pricing behavior as inflation follows a high course, albeit temporary.

As I have mentioned earlier while talking about global risks, forecasts for our largest trade partner, the European Union, suggest that it would take a long time for foreign demand to return to pre-crisis levels. 4  BIS Review 79/2010  Industrial production has been increasing moderately since March 2009. According to the latest Business Tendency Survey conducted by the CBT, the moderate recovery in orders both from domestic and foreign markets continues. On the expectations side, there is improvement both in the real sector and consumer confidence indices. Nevertheless, the stillweak foreign demand and the fact that Turkey’s exports predominantly rely on products that are susceptible to cyclical developments are retarding a rebound in industrial production. Uncertainties regarding aggregate demand urge firms operating in the manufacturing industry to take a cautious stance and to be more reluctant about inventory building compared to the periods of strong growth. The biggest headache for Turkey, unemployment, assumed a slight recovery trend in the third quarter of 2009 as the economy started to generate employment opportunities again. Industrial employment, which is the sector that is most severely affected by the crisis and became the main driver of contraction in non-farm employment, started to recover at a moderate pace. The services and construction sector supported non-farm employment as well. Despite the recent partial recovery, the unemployment rate is still quite high compared to the pre-crisis period. This high unemployment rate curbs the consumption demand as well.