Moreover, an outcome whereby problems in advanced economies intensify, leading to contraction in domestic economic activity, may require an easing in all policy instruments. In other words, we may consider joint cuts in policy rates and reserve requirement ratios. Although downside risks to global economy remain notable, upside risks are also becoming more significant. Major uncertainties exist regarding the lagged impacts of the exceptionally loose monetary policies implemented by advanced economies on global economic activity and inflation. If the global economy faces a faster-than-expected recovery in the upcoming period, inflationary pressures may arise sooner than envisaged in the advanced economies. Materialization of such a scenario would mean a tightening by using policy rates as well as reserve requirements against higher global policy rates and demand-pull inflationary pressure. As I have previously emphasized, the outlook for oil and other commodity prices remains uncertain. Should the increases in commodity prices persist and impose risks on achieving medium-term inflation targets, additional tightening may be implemented sooner than implied by the baseline scenario. However, given that higher oil prices will also worsen the current account balance, a possible policy response will consider macro financial risks as well. Therefore, the exact content of the adopted policy mix may vary depending on the outlook for external demand, capital flows and the credit growth. Esteemed Guests, We will continue to monitor fiscal policy developments closely while formulating our monetary policy strategy. Our inflation forecasts assume that the ratio of fiscal expenditures to GDP will evolve as projected in the MTP.

Accordingly, the policy rate has been kept constant since February, while the weighted average of reserve requirement ratios for Turkish lira liabilities was hiked by 410 basis points in March and April  2  BIS central bankers’ speeches  (Table 1). Meanwhile, in April, FX reserve requirement ratios were differentiated by maturity where short-term FX reserve requirement ratios were increased slightly. Thus, the policy mix composed of policy rates and reserve requirement ratios has been adjusted to deliver a monetary tightening, implying a more cautious monetary stance (Chart 2). Table 1. Weighted Average of TL and FX Required Reserve Ratios (Percent) Decision Date  TL Weighted Average  FX Weighted Average  January 24, 2011  9.4  11  March 23, 2011  13.2  11  April 21, 2011  13.5  12  Source: CBRT. Although credit growth slowed quarter-on-quarter in the first quarter, the rate of increase in loans has yet to fall to levels compatible with financial stability (Chart 3). The upward trend in loans is driven by both supply and demand side factors. While intense competition is effective on the supply side; the favorable economic outlook and the improvement in employment conditions help to keep demand for loans robust. However, we expect that credit utilization will continue to lose pace in the second quarter due to the lagged effects of the current monetary tightening. 2. Chart 3. Chart 4. Loans  TL Business Loan and Deposit Rates  (Nominal, January 2007=100)  (Annual, Percent, 4-week Average)  Source: CBRT.