Nevertheless, 12 and 24 month-forward expectations are slightly higher than the figures implied by inflation targets for the ends of 2011 and 2012. 2. Monetary policy response  Dear Members of the Press, Dear Guests, After commenting briefly on inflation developments, I would like to cover the policies pursued by the Central Bank during the last quarter. Although domestic demand was relatively stronger during the third quarter of 2010, aggregate demand conditions continued to support disinflation due to weak external demand, bringing core inflation to historically low levels. Therefore, the Monetary Policy Committee maintained its stance of keeping policy rates constant for some time, and to keep them at low levels for a long period. Observing the surge in capital inflows as the last quarter of the year began, in anticipation that the combination of strong domestic demand and weak external demand will continue, I would like to remind you that rapid credit growth coupled with the risks regarding the current account deficit and financial stability necessitates caution. In this respect, considering the favorable developments in credit markets and the ongoing recovery in economic activity, the CBT has, to a large extent, completed the process of reversing the temporary liquidity measures implemented during the crisis period. Accordingly, overfunding of the markets was halted and the required reserve ratios were increased. Moreover, to facilitate the use of alternative macroprudential policy tools, the remuneration of required reserves was terminated and the operational framework of liquidity management was changed.

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.