I would like to underline that as the Central Bank, we will closely monitor the lagged effects of our policy measures on price stability and financial stability, and will take additional measures if deemed necessary. In assessing risk factors and related monetary policy measures under current circumstances, we adopt a framework where both price stability and financial stability are taken into account. Therefore, risk factors are not only assessed with respect to their impact on the level but also on the composition of the aggregate demand. This is because the level of aggregate demand is related to price stability, while its composition relates directly to financial stability. Therefore, we evaluate risk factors regarding the global economy against this backdrop. Although downside risks regarding the global economy have decreased compared to the previous reporting period, they still remain significant. Problems in credit, real estate and labor markets in many advanced economies are yet to be completely solved. Moreover, uncertainties regarding debt sustainability and the impact of a possible fiscal consolidation persist. Meanwhile, rapid increases in oil prices may restrain global recovery. All these factors continue to feed downside risks regarding the pace of global growth. The possibility of prolonged period of slow global growth not only poses downside risks regarding external demand, but also keeps prospects for strong capital flows to Turkey vigorous. Should such a scenario materialize, a policy mix of low policy rate, high reserve requirement ratios and a wide interest rate corridor may be implemented for a long period.

Monetary policy developments and monetary conditions  The mentioned discrepancy between advanced and emerging economies accelerates capital flows into countries, such as Turkey, with strong economic fundamentals and relatively low risk. Rapid credit expansion and widening current account deficit fueled by short-term capital inflows increase risks to financial stability and carry the potential to hamper price stability  BIS central bankers’ speeches  1  over the medium term. This gives rise to adopting different approaches that incorporate financial stability into the monetary policy framework. As you have been following very closely, we have designed and adopted a new policy strategy as of the end of 2010. While our new policy approach maintains the priority of price stability, we also observe financial stability as a supporting objective. In this context, in addition to policy rates, we jointly use complementary tools such as reserve requirement ratios and the interest rate corridor. The primary objective of this new approach is to contain the negative effects of the ongoing global imbalances on the Turkish economy. Now, I would like to summarize the decisions that we have made within the new policy strategy. The downtrend in inflation during the last quarter of 2010 allowed the CBRT to give relatively more weight to financial stability during this period. In this respect, in order to reduce short-term capital inflows, we lowered policy rates on one hand and raised the volatility in short-term interest rates by widening the interest rate corridor on the other hand.