Durmuş Yılmaz: Reform strategies and expectations in the new normal – a public perspective Speech by Mr Durmuş Yılmaz, Governor of the Central Bank of the Republic of Turkey, at the Active Academy 8th International Finance Summit, Istanbul, 8 December 2010. *  *  *  Distinguished participants and esteemed guests, Before starting my speech, I would like to thank the directors and staff of the Active Academy for their efforts in organizing the 8th International Finance Summit. The Turkish economy, which has achieved stronger macroeconomic fundamentals and a sound financial system thanks to steadfast implementation of structural reforms since 2001, has been one of the economies that exited the crisis very rapidly. In the upcoming period, the new economic conjuncture needs to be managed wisely in order to sustain macroeconomic stability. Therefore, today I would like to devote my speech entirely to macroeconomic stability. Distinguished participants, The recovery observed in the aftermath of the crisis continues albeit being slow and gradual. However, the downside risks pertaining to the future global growth outlook persist. Vulnerabilities continue especially in developed countries that experience serious deterioration in budget balances and an excessive rise in public debts. Perceptions are growing that the accommodative fiscal policies and expansionary monetary policies adopted by these countries fall short of achieving the desired results in unemployment and growth. Meanwhile, developing countries, which have stronger financial structures, are enjoying a faster recovery process. The decoupling observed between these two groups of countries is expected to continue in the upcoming period as well.

Materialization of such a scenario could lead to temporarily lower policy rates than envisaged in the baseline scenario and the use of macroprudential instruments in the direction of tightening in order to cut the pace of credit growth in tandem with the temporary rate cuts. The second scenario illustrated in the chart was shared with the public in our Inflation Report of October 2010. Both recent economic developments in Europe and decisions taken  BIS Review 174/2010  3  by central banks of developed countries increase global economic uncertainty significantly. Should the measures taken at a global level cause long-term and high-rated increases in food and commodity prices, and should such increases lead to a deterioration in the price setting behavior, which in turn, hampers achieving the medium-term inflation targets, an earlier-than envisaged tightening in the baseline scenario would be considered. In this case, as domestic credit expansion would weaken, the use of macroprudential instruments might not be needed in the direction of tightening. If measures taken in developed countries remain inadequate, the third scenario illustrated in the lower left-hand part of the chart might be considered. In that case, as indicated in the latest Inflation Report, should the global economy face a longer-than-anticipated period of anemic growth, the monetary tightening envisaged to start in the final quarter of 2011 under the baseline scenario might be postponed. Moreover, an outcome, whereby global economic problems intensify and contribute to a contraction of domestic economic activity, may trigger a second round of easing.