the market. these reforms would also contribute to turkey ’ s social security system by promoting registered employment. 23. real labor costs, which have gradually been increasing since the second quarter of 2010, remained flat in the final quarter. unemployment rates hovering above pre - crisis levels continued to contain the rise in unit labor costs, becoming the primary factor restricting the run - up in services prices in 2010. bis central bankers ’ speeches esteemed guests, 24. in 2010, the foreign trade deficit soared amid weak external demand and the rapid recovery in the domestic demand. in addition to the surge in the foreign trade deficit, the runup in services expenditures further aggravated the current account deficit. in this period, transportation costs also increased due to rise in imports. thus, the current account deficit, which was down to usd 14. 3 billion in 2009, reached usd 48. 6 billion in 2010. 25. recent data indicate that the surge in imports continued in the january - february period in line with the robust domestic demand, and exports continued to recover gradually owing to weak external demand. however, the political unrest in north africa slows down the recovery in turkey ’ s exports, and also pushes up our imports through oil price hikes. therefore, we predict the upward trend in the current account deficit to persist in the short run also taking into account the low base effect from last year. yet, we also envisage that the dampening effects of our recent policy measures on loans and imports will materialize as of the second quarter of the year. bis central bankers ’ speeches distinguished guests, 26. domestic credit volume, which surged in 2010, accelerated further in the final quarter of the year. as the effects of the crisis waned, the number of sectors utilizing loans increased rapidly and maturities were extended. an analysis of the rise in real sector loans by sub - categories reveals that this rise was supported by the rally in both consumer and business loans. meanwhile, loan utilization by small and medium - sized enterprises, which were those hit most severely by the crisis, increased as well. 27. i would like to underline that the vigorous loan utilization was underpinned by measures taken by the cbrt in the aftermath of the crisis with a view to maintain the functionality of the credit markets, as well as by the consequent rapid recovery in economic activity and the favorable economic outlook. furthermore, ample global liquidity owing to the monetary easing implemented by major central banks and the favorable economic outlook providing low and fore

12. 05 09. 05 06. 05 03. 05 - 20 source : turkstat, cbt. overall, domestic demand conditions continue to support disinflation ( figure 10 ). therefore, the underlying inflation is expected to decelerate in the medium term. figure 10 : output gap - 2 - 4 - 6 - 8 08q1 07q3 07q1 06q3 06q1 05q3 05q1 04q3 04q1 03q3 03q1 02q3 02q1 01q3 01q1 00q3 00q1 - 10 source : cbt. dear guests, after the significant weakening of the turkish lira in the first four months of 2008 ( figure 11 ), exchange rates have reversed direction in the past two months, easing to some extent potential pressures on tradable inflation resulting from the exchange rate pass - through. in the april inflation report and the open letter, the first round impact of the recent depreciation was estimated to be close to 2 - percentage points for the end - 2008 headline inflation. the recent rebound in currency has led to a downward revision in the estimated pass - through. we now anticipate a cumulative exchange pass - through of around 1. 2 percent points for 2008, most of which has already been materialized between march - may period. figure 11 : risk premium and nominal exchange rates ytl / currency basket ( 0. 5 euro + 0. 5 us dollar ) 1, 9 embi + turkey ( right axis ) 1, 8 1, 7 1, 6 1, 5 07. 08 05. 08 03. 08 01. 08 11. 07 09. 07 07. 07 05. 07 1, 2 03. 07 01. 07 1, 3 11. 06 1, 4 source : cbt. longer - term interest rates have also increased in 2008 due to rising risk premium and inflation expectations ( figure 12 ). although higher market interest rates contain the domestic demand and support disinflation, the impact of the heightened risk premium on the overall pricing behavior should be closely monitored. figure 12 : benchmark interest rate and policy rate benchm ark interes t rate policy rate 07. 08 04. 08 01. 08 10. 07 07. 07 04. 07 01. 07 10. 06 07. 06 04. 06 01. 06 source : cbt, ise. baseline assumptions in the april inflation report envisaged a constant path for oil prices around