Meanwhile, we assumed other tax adjustments and administered prices would be consistent with the inflation targets and automatic pricing mechanisms. Thus, there has been no change in the end-2013 inflation forecast stemming from the fiscal policy. Regarding the fiscal policy stance, recently-revised MTP projections are taken as given. Accordingly, we assumed that fiscal discipline would be preserved and the ratio of primary expenditures to GDP would gradually decline starting next year. 3. Inflation and the monetary policy outlook  Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. Medium-term forecasts perceive an outlook where a gradual increase in the predictability of the monetary policy is continued. In addition, we envisage that the cautious stance of the monetary policy is preserved and the liquidity policy remains tight and the annual growth rate of credit will fall to 15 percent reference value by mid-2014 owing also to recent macroprudential measures. Accordingly, inflation is expected to be, with 70 percent probability, between 6.3 percent and 7.3 percent (with a mid-point of 6.8 percent) at end-2013 and between 3.8 percent and 6.8 percent (with a mid-point of 5.3 percent) at end-2014 (Chart 21). As a result, we revised inflation forecasts for 2013 and 2014 upwards by 0.6 and 0.3 percentage points, respectively, in the inter-reporting period. 0.4 percentage points of the revision in 2013 was led by exchange rate developments, while 0.1 percentage points stemmed from the rise in average oil price assumption.

Source: EPFR. Chart 3  Chart 4. CBRT Funding# (2-Week Average, Billion TL)  Policy Rate and Liquidity Policies (Percent)  # Other CBRT funding includes primary dealer repo transactions, repo transactions at the BIST Repo and the Reverse Repo Market and lending depo facility at the Interbank Money Market. * 18 basis points were added to BIST Interbank Overnight Repo Rate. For BIST Interbank Repo Market overnight rates see: http://borsaistanbul.com/veriler/verileralt/tahvil-ve-bono-piyasasi-verileri/piyasa-verileri Source: BIST, CBRT. BIS central bankers’ speeches  5  6  Chart 5. Chart 6. Yield Curve* (Percent)  2-Year Real Interest Rates for Turkey* (Percent)  *Calculated from the compounded returns on bonds quoted at the BIST Bonds and Bills Market by using ENS method. Source: BIST, CBRT. * Calculated as the 2-year discounted bond returns derived from the yield curve, minus the 24-month ahead inflation expectations from the CBRT Survey of Expectations. Source: BIST, CBRT. Chart 7. Chart 8. TL Loan Rates (Percent)  Funding Costs of Banks (Percent)  Source: CBRT. Source: PDP, CBRT. Chart 9. Chart 10. Growth Rate of Loans (Adjusted for Exchange Rate, 13-Week Average, Annualized, Percent)  Annual Growth Rate of Loans (Percent)  Source: CBRT. Source: CBRT. BIS central bankers’ speeches  Chart 11. Chart 12. Current Account Balance (CAB)* (12-Month Cumulative, Billion USD)  Real Effective Exchange Rate (CPI based, 2003=100)  * Third quarter data includes July-August realization and September forecast. Source: CBRT, TURKSTAT. The dotted lines show the 2 percent annual trend starting from June 2003=100 and June 2003=90. Source: CBRT. Chart 13.