Worse-than-expected outcomes regarding vegetable prices and the slower-than-expected downward correction in meat prices in the third quarter necessitated an upward revision in the assumption for food inflation in the short-term. In this respect, we revised our food inflation assumption from 7.5 percent to 10.5 percent for end-2010, while keeping our assumptions for food inflation for 2011 and 2012 at 7 percent (Table 1). The revision in question pushed our inflation forecast for end-2010 up by 0.8 percentage points. Although unprocessed food inflation was markedly higher than expected in the third quarter, the deceleration in core goods and services inflation was more significant than envisaged. In other words, the core inflation trend, which pins down the initial point of the medium-term forecasts, has decreased at a faster-than-expected pace. This development necessitated a downward revision of the inflation forecasts for end-2010 by 0.8 percentage points, while also favorably affecting medium-term forecasts. With stronger-than-expected domestic demand data in the last period, the output gap was revised upwards compared to the previous forecast (Table 1). In other words, we base our assumptions on an outlook, in which the contribution of aggregate demand conditions to disinflation in the revised forecast is slightly more limited as opposed to the July Inflation Report. This development has not affected short-term inflation forecasts, but has had some upward impact on medium-term forecasts. Increased expectations that the developed economies would continue to pursue expansionary monetary policy have led to rapid increases in commodity prices.

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).