Then, I will outline the Central Bank’s inflation forecasts presented in the Inflation Report that will be posted on our website shortly. In the first quarter of 2010, as perceptions regarding recovery in the global economy became more pronounced, the trend of increase in risk appetite in global financial markets continued. Accordingly, as had been the case since the second half of 2009, emerging markets attracted more capital through increased portfolio movements. On the other hand, risk premium indicators in most developing countries remained below those of pre-crisis levels. In  this period, Turkey’s risk premium indicators continued their positive trend and did not differentiate from the general trend except for short periods when developments specific to our country were pronounced (Figure 21). The improvement in global risk perceptions in the first quarter led the currency of many developing countries to appreciate. In terms of changes in currency values, the Turkish lira did not significantly differ from currencies of other emerging markets in this period and the relatively stable course of the Turkish lira in the crisis period continued throughout the postcrisis process as well (Figure 22). National income data of the last quarter of 2009 were consistent with the outlook we presented in the January Inflation Report. In this period, while the mild recovery in private sector demand continued, public sector consumption expenditures increased more than envisaged due to temporary factors. Meanwhile, persisting problems in the global economy restricted foreign demand, whereas stock accumulation started, albeit slowly, along with the improvement in domestic demand.

In this respect, as implied by the fiscal rule, it is assumed that the fiscal space created by the stronger than expected economic activity leading to better than expected performance in budget revenues since the second half of 2009, would be used mostly to reduce the government debt stock; therefore, the goals set out in the MTP be implemented through institutional and structural improvements in 2011 and onwards. In other words, it is assumed that tax adjustments would be consistent with the inflation targets and automatic pricing mechanisms throughout the forecast horizon. Accordingly, it is envisaged that the rising debt-to-GDP ratios would gradually reverse course starting in 2011, and hence the risk premium would not display any significant changes throughout the forecast horizon. Against this background, assuming that liquidity measures are normalized gradually over the short term and that policy rates are kept constant at current levels for some time followed by limited increases starting in the last quarter of 2010, with policy rates staying at single digits throughout the three-year forecast horizon, the medium-term forecasts suggest that, with 70 percent probability, inflation will be between 7.2 and 9.6 percent with a mid-point of 8.4 percent at end-2010, and between 3.6 and 7.2 percent with a mid-point of 5.4 percent by the end of 2011. Furthermore, inflation is expected to decline to 5.0 percent by the end of 2012 (Figure 34). Despite the upward revision in the output gap, it is expected that the economic recovery would be gradual.