Durmuş Yilmaz: Recent economic and financial developments in Turkey Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the press conference for the presentation of the Inflation Report, Ankara, 26 October 2010. *  *  *  Distinguished Guests and Members of the Press, Welcome to the press conference held to convey the main messages of the October 2010 Inflation Report. The report typically summarizes the economic framework addressed in monetary policy decisions, elaborates global and domestic macroeconomic developments and presents the medium-term inflation forecasts, which have been revised in view of previous quarter developments, along with the monetary policy stance. Before moving on to the Central Bank’s assessments of inflation outlook and economic activity, which I will share with you in detail shortly, I would like to summarize the current global conditions that continue to be determinant of the domestic economic outlook. Data released in the third quarter indicate that the recovery will be quite slow and gradual albeit a second contraction in global economic activity is not very probable. The marked decoupling between the developed and developing countries in terms of growth dynamics persisted through the second quarter; where global growth continued to be driven by developing countries (Figure 1). Meanwhile, the persisting negative outlook in the labor markets of developed countries confirms the slow pace of rebound in these economies on one hand; and leads us to believe that the improvement in employment conditions will take a long time, on the other (Figure 2).

BIS Review 159/2010  3  In the third quarter, while energy prices followed a horizontal course due to the developments in oil prices, the inflation trend in core goods excluding food, energy, alcoholic beverages, tobacco and gold maintained its low level. Meanwhile, the decline in annual services inflation became more marked than expected. Services prices excluding food and transportation, the sensitivity of which is relatively higher against demand, recorded its lowest level (Figure 10). The steady downward tendency in core inflation indicators continued in the third quarter due to this beyond expected slowdown in services prices (Figure 11). The reverberations of the strong course of the Turkish lira on core goods prices were also influential in this development. In this respect, the underlying inflation implied by the core indicators continued to slow down and followed a course consistent with the medium term targets. Accordingly, the gap between Turkish core inflation indicators and those of other developing economies continued to narrow in the third quarter (Figure 12). Medium-term inflation expectations, which displayed a downward trend from the second quarter in the framework of these developments, registered a limited decline in the third quarter (Figure 13). Core inflation indicators that steadily went down despite the rise in consumer inflation prevented deterioration of the medium-term expectations in this period. While recent inflation expectations showed a limited quarter-on-quarter decline, it appears  4  BIS Review 159/2010  that despite longer maturities, expectations are not differed from their previous quarter level so far (Figure 14).