with the domestic and foreign demand outlook. consumer inflation undershot the forecasts in the last quarter of 2012 and stood within the uncertainty band ( 3 – 7 percent ) with 6. 2 percent at the year - end ( chart 15 ). this lower - thanenvisaged inflation rate was mainly driven by the developments in unprocessed food prices, which were stated to pose downside risk on inflation in the october inflation report. meanwhile, core inflation indicators were broadly consistent with expectations. chart 15. october 2012 inflation forecasts and realizations ( percent ) * shaded region indicates the 70 percent confidence interval for the forecast. source : turkstat, cbrt. bis central bankers ’ speeches cumulative effects of the previous year ’ s exchange rate and import price movements gradually waned. coupled with the ongoing slowdown in domestic demand, this led to a sustained fall in the annual rate of increase in core goods prices. meanwhile, prices of services remained on a mild track ( chart 16 ). against this backdrop, core inflation indicators maintained a downward trend ( chart 17 ). chart 16. chart 17. prices of core goods and services core inflation indicators sca - h and sca - i ( annual percent change ) ( annual percent change ) source : turkstat. source : turkstat. now, i will touch upon the developments in economic activity on which the inflation forecasts are based besides the short term outlook. third - quarter national income data point that domestic demand conditions remained weak due to private investment demand. private consumption, which displayed an increase for the first time in a protracted period, limited the slowdown in final domestic demand. nevertheless, demand conditions followed a slightly weaker course compared to the projections in the october inflation report ( chart 18 ). last - quarter data indicate a mild pick - up in consumption and investment demand as envisaged. accordingly, output gap forecasts regarding the second half of 2012 are slightly revised downwards compared to the previous report. chart 18. 2012q3 final domestic demand : forecast and realizations ( seasonally adjusted, 2008q1 = 100 ) source : turkstat, cbrt. meanwhile, we estimate that easing financial conditions due to the recent rise in capital inflows may result in a higher - than - expected growth in final domestic demand in the first half of 2013. indicators for orders, loans and other leading indices also support this outlook. bis central bankers ’ speeches accordingly, we based the projections on a stronger domestic demand outlook for the first half

to the permanence of recovery. the ever - growing budget deficits and swelling public debt stocks driven by the expansionary fiscal policies adopted especially in developed countries became an important risk factor as they push long - term interest rates up and affect private demand adversely. meanwhile, sharp rises are observed recently in the risk premia of greece, spain, portugal and italy with high debt stocks as concerns over the sustainability of their current budget deficit are elevated. after summarizing the stages that the crisis has gone through since mid - 2007, i would like to talk about the reasons for the emergence of the crisis from the viewpoint of the main theme of this conference ; i. e. “ the issue of governance ”. there is a consensus over the fact that in the pre - crisis period, markets developed, deepened and grew more complex at an astounding pace but the institutions responsible for inspection and supervision failed to keep up with this change. moreover, basel ii regulations made credit rating institutions a part of the regulation process ; and complex derivative products and risk assessment methods spurred over - borrowing. in the pre - crisis period, the accommodating monetary policies adopted by central banks of developed countries in the form of the low interest rate - high liquidity led to moral hazards in financial markets. within this framework, assuming that financial markets always operate efficiently, we can list the reasons for the crisis as deregulation, financial innovations, problematic accounting standards and global instabilities. the liberty brought by deregulation led to shortsightedness driven by over - confidence and short - term profits were preferred at the cost of risking the financial system in the long run. financial innovations generated complex derivative products, where who owes how much to whom is not clear and, which actually lead to multiplying of risk instead of distribution of it. meanwhile, the accounting standards based on “ fair value ” principle made cyclical effects and fuelled the destructive power of the crisis. having mentioned the stages and reasons for the crisis, now i would like to share with you the monetary policy implemented by the central bank of turkey during the crisis and my evaluations on the recent developments in the turkish economy. projecting that inflation would decrease sharply as of the last quarter of 2008, the central bank of turkey implemented a monetary policy focusing on restraining the potentially harsh impact of the global financial crisis on financial activity without conflicting with the primary objective of maintaining price stability. during this process, the cbt has delivered sizeable cuts in policy