one of the cornerstones of the turkish economy. a set of reforms for developing a functioning market economy was put into practice. interest rates were more and more determined in the markets, and some measures were taken regarding the supervision of the banking sector. however, before taking the necessary actions for strengthening the domestic financial markets, such as measures for more transparent balance sheets and more careful risk management in the intermediation process, the capital account was liberalized at the end of the 1980s. the turkish economy with an inefficient banking sector became open to intensive capital movements. in my view, the turkish economy turned into an open one before it became strong enough to cope with capital movements that would occur in the 90s. the sequencing of reforms for the turkish economy in general and its financial system in particular should have been set differently. what went wrong in the turkish economy in the 90s? policies did not concentrate on ensuring and maintaining macroeconomic stability ; different priorities, delayed reforms, loose fiscal policy and accommodative monetary policy led to dynamic instability throughout these years. as a result, inflation climbed to 79 percent on average, budget deficit widened so much that the public sector borrowing requirement reached 15. 5 percent of the gnp by 1999, the output growth was very low on average and volatile compared to other emerging markets. so, poor macroeconomic fundamentals and a fully liberalized capital account brought about vulnerability of the economy to external shocks and the turkish economy faced severe financial crises and turbulences in the 90s. such an environment had also important implications on the financial system. having suffered from the reckless and unstable macroeconomic management together with inefficient supervision, the system deteriorated severely and faced a serious moral hazard problem. dear participants, a closer look at the turkish financial system would be helpful to characterize its weaknesses and structural problems during that period. first of all, because of the high public sector borrowing requirement, fiscal dominance increased considerably in the financial markets and led the public sector to crowd out the private sector. hence, the relationship between the banking sector and real sector could not develop as it should have done. instead, the relationship between the banking sector and the public sector strengthened year after year. secondly, the banking sector as a whole failed to exercise good risk management in its credit allocation. since financing the public sector budget deficits with high real interest rates was an easy way to make profits, banks did not pay much attention to basic principles of risk management, such as maturity and currency

, we kept our oil price assumption constant at 44 usd for 2016, and increased it to 54 usd for 2017. on the food front, food inflation remained far below the level envisaged in the july inflation report due to unprocessed food inflation in the third quarter of 2016. taking account of the current trend of unprocessed food inflation as well as the decrease in the demand for food stemming from the fall in tourism revenues, food inflation, which we assumed to be 8 percent by end - 2016 in the july inflation report, was revised downwards to 6 percent. due to the ongoing weakness in food demand owing to the tourism sector that will persist in 2017 coupled with the measures taken by the food and agricultural products markets monitoring and evaluation committee ( the food committee ), we expect food inflation to be lower than its historical average in 2017 as well. accordingly, we revised our assumption for food inflation downwards from 8 percent to 7 percent for end - 2017. our medium - term forecasts are based on an outlook that adjustments to taxes and administered prices will be consistent with the inflation target and automatic pricing mechanisms. for medium - term fiscal policy stance, we use the mtp projections covering the 2017 – 2019 period. 3. inflation and the monetary policy outlook esteemed guests, now, i would like to present our inflation and output gap forecasts based on the outlook i have described so far. given a cautious policy stance that focuses on bringing inflation down, we estimate inflation to approach gradually to the 5 - percent target. inflation is likely to be 7. 5 percent in 2016, falling to 6. 5 percent in 2017 and stabilizing around 5 percent in 2018. accordingly, we expect inflation to be, with 70 percent probability, between 7 percent and 8 percent ( with a mid - point of 7. 5 percent ) at end - 2016 and between 5 percent and 8 percent ( with a mid - point of 6. 5 percent ) at end - 2017 ( chart 17 ). 8 / 10 bis central bankers'speeches the turkish lira fluctuated following the july inflation report, while oil prices increased. we revised our assumptions for tl - denominated import prices upwards for the upcoming period compared to the previous reporting period. on the other hand, we envisage that the latest domestic developments will curb domestic demand particularly in the short term. accordingly, we revised our output gap forecasts downwards. the year - end consumer inflation forecast for 2016 remained unchanged as downside effects and upside