. the developments since november 2008 in domestic financial markets and falling inflation have confirmed the accuracy of our projections and the policy rate - cut decisions, increasing the confidence in monetary policy. as a consequence of the measures taken and the limited recovery in risk perceptions, the level of market interest rates today is below the pre - global crisis level in both nominal and real terms. having neutral interest rates at lower levels during economic recessions is an expected development in well - functioning economies, but it has never been experienced in turkey before. this development should be perceived as an indicator of the normalization of the turkish economy. despite the marked deterioration in economic activity in turkey, there were at least three factors that prevented an outright depression. these factors were the soundness of the financial system, low levels of turkish household indebtedness, and an assertive monetary policy stance, which aimed at mitigating the impact of the crisis on the domestic economy. reviewing these factors, albeit briefly, would allow a better understanding of turkey ’ s economic prospects. the turkish financial system proved to be resilient to the financial crisis relative to many other emerging economies. unlike some of its peers, the turkish banking system did not require any rescue packages or other forms of government support throughout the crisis. the robustness of the turkish financial system was to a large extent a consequence of the financial reforms implemented in the aftermath of the 2001 financial crisis we experienced in turkey. therefore, in contrast to many other countries that have recently revised or put into practice restructuring, supervisory, and regulatory frameworks, many of these were already established in turkey several years ago. furthermore, leading into the recent crisis, the turkish financial system was well capitalized – with capital adequacy ratios exceeding 18 percent – and had relatively low loan - to - deposit and leverage ratios, as well as low levels of foreign exchange rate exposure. relative strength of the financial sector enabled the implementation of rapid and front loaded rate cuts. no bail out scheme or other forms of public support needed during this period. this has provided room for expansionary fiscal policies. in addition to the sound structure of the financial system, low levels of household indebtedness relative to other emerging economies also contributed to the resilience of the turkish economy during the crisis. monetary tightening implemented by the central bank between 2006 and 2008 played a critical role in curbing the lending growth and checking the rise in household debt. prudent and preemptive measures taken by the banking regulatory and supervision

to the global economy accompanied with deceleration in economic activity kept the banks ’ lending appetite at low levels. the elevation in credit risk, the decline in foreign financing facilities and the short maturity of deposits urged banks to be cautious in terms of credit supply and curbed the decline in credit interest rates. in spite of a limited rebound in credits recently, we believe there is little chance for this move to become a permanent recovery as long as the global economy is not stabilized ( figure 19 ). figure 19 : commercial and consumer loans ( 4 week moving average, percent ) 1. 5 0. 5 - 0. 5 - 1 commercial credits - 1. 5 consumer credits source : cbt. distinguished members of the press, in the first quarter of 2009, the sharp contraction in global economic activity and its larger than anticipated impact on domestic activity called for a downward revision of the outlook for aggregate demand developments from the previous reporting period. in the january inflation report, economic activity was expected to display a significant decline in the last quarter of 2008, while it was anticipated that the speed of contraction would start to lose pace during the first quarter of 2009. in line with expectations, the gross domestic product ( gdp ) displayed a sizeable drop in the last quarter of 2008 on a quarterly and on an annual basis ( figures 20 and 21 ). recent readings suggest that economic activity will display a sharperthan - envisaged slowdown and that the contraction in the economy in the first quarter of the year will register double - digit figures. this development was the main reason underlying the downward revision in the outlook for inflation and monetary policy in the last three months. figure 20 : quarterly gdp growth rate figure 21 : gdp ( percent ) ( seasonally adjusted fixed prices of 1998, billion tl ) 9. 4 8 6. 8 6. 2 8. 4 7. 3 6. 9 5. 3 4. 7 2. 8 1. 2 1. 1 - 2 - 4 - 5. 7 source : turkstat. 2008 - 2 - 6. 2 - 8 2008 - 4 - 6 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 source : turkstat, cbt. an analysis of gross domestic product developments in terms of output in the last quarter of 2008 reveals that all the subcomponents except those of the agriculture sector contributed negatively to growth. a comparison of this financial crisis with that in 2001 points to a similarity between not only the gross