##18 ). market rates also reflect growing expectations of delay and moderation in the rate - hike cycle. accordingly, benchmark bond yields fell during the second quarter and continued to hover around historic lows despite the increased risk aversion ( figure 19 ). the downturn in market rates was also driven by the improved inflation outlook. the flattening of the yield curve in july compared to april indicates that policy rate - expectations of market players have been revised downwards ( figure 20 ). the downslide was more significant in market rates than in inflation expectations during the second quarter, pushing medium - term real rates down to historic lows ( figure 21 ). yet i would like to underline that real market rates in turkey did not decouple substantially from other emerging economies ( figure 21 ). the ongoing downward trend both in market rates and the tightness in credit conditions contributed to the maintenance of low levels in loan rates. no remarkable change is observed in loan rates in the second quarter despite the continuing improvement in credit markets ( figure 22 ). 3. inflation and monetary policy outlook having summarized the central bank ’ s monetary policy stance as well as the effects of this stance on the markets, i would like to share with you the economic outlook underlying our revised forecasts. the first - quarter data on the gdp were largely consistent with the outlook presented in the april inflation report. accordingly, the gdp expanded by 11. 7 percent year - on - year during the first quarter of 2010 ( figure 23 ). this increase was driven by the low level in the same quarter of 2009. meanwhile, in seasonally adjusted terms, the gdp followed a nearlyhorizontal course by growing by 0. 1 percent quarter - on - quarter ( figure 24 ). the weak global economy continued to weigh on economic activity and employment in external demand - oriented sectors. the recovery in the private sector gained stability in line with our forecasts. in this respect, the largest contributors to growth in the first quarter became private consumption expenditures and the change in stocks. this was also affected by the low base in the same quarter of 2009 ( figure 25 ). meanwhile, public expenditures contributed to growth by – 0. 8 points ( figure 26 ). recent domestic demand indicators show that private consumption demand continues to grow and it will run above pre - crisis levels in the second quarter. meanwhile, despite the rebound in the first quarter, investments remain below pre - crisis levels. these developments indicate that the total final domestic demand

the base effects driven by the volatile unprocessed food prices in the past year and the tax hikes implemented at the beginning of 2010 ( figure 33 ). therefore, in order to help economic agents to better interpret developments in headline inflation, which would increase the effectiveness of expectations management, i would like to provide you with some more information about this issue. owing to the base effects resulting from the tax hike on tobacco in 2009 and the tax cuts on durable goods in march and april 2009, which began to cease in june 2009, inflation is likely to fall markedly in july 2010. inflation is expected to rise in august due to the sharp drop a year ago, and decline substantially in the final quarter with the reversal of base effects from food prices. the contribution of tax hikes introduced in early 2010 will have largely disappeared and this will be the primary factor influencing the inflation trend in the first two months of 2011. although annual inflation may rise during the second quarter of 2011 amid very low base effects from food inflation, inflation is expected to fall gradually in subsequent periods to stabilize at around 5 percent by early 2012. i think analyzing the forecasts by comparing the latest data with the previous report period would help to better understand the changes in forecasts. as i have mentioned earlier, we revised our output gap estimates slightly downwards compared to the april inflation report, owing to the anticipated impacts of the problems in the euro area on aggregate demand ( figure 34 ). however, there is no significant revision in the pace of the recovery, as the downward revision in the monetary policy stance is expected to partially compensate for the adverse impact of weaker external demand. in this respect, we based our assumptions on an outlook, in which there would not be a remarkable change in the pace of the recovery in economic activity. accordingly, there has been no significant revision in the inflation forecasts for 2011 and onwards ( figure 34 ). any new data or information regarding the inflation outlook may lead to a change in the monetary policy stance. therefore, i would like to underline once more that the assumptions regarding the future policy rates underlying the inflation forecast should not be perceived as a commitment on behalf of the cbt. 4. risks in the last part of my speech, i would like to provide some information on the risks regarding the inflation outlook in the upcoming period and the prospective monetary policy strategies to be implemented should these risks materialize. by influencing commodity prices and external demand conditions, global economic activity would continue to be the main factor driving