due to the policy measures adopted. thus, the net external demand made a positive contribution to growth on a quarterly basis for the first time after a long stretch. in other words, the composition of growth started to change in the desired direction ( chart 10 ). owing to the lagged effects of the contractionary reserve requirement and liquidity policies, domestic demand continued to lose pace in the third quarter. also, due to measures taken by the banking regulation and supervision agency ( brsa ) and the tight fiscal policy stance, domestic demand growth was brought to a sustainable level in the third quarter. in this period, credit, production and sales data, as well as confidence indices, indicated ongoing loss of momentum in private consumption demand. in this context, the outlook for the third quarter was based on an ongoing slowdown in domestic demand ( chart 11 ). bis central bankers ’ speeches driven mainly by advanced economies, global growth forecasts were subject to substantial downward revisions in the third quarter. in this respect, projections for turkey ’ s exportweighted global growth index point to a weaker medium - term outlook compared to the previous period ( chart 12 ). therefore, forecasts were based on an outlook of weaker external demand compared to the previous period. consequently, the output gap was revised upwards for the short - term and downwards for the medium term. moreover, assumptions on oil and other commodity prices were revised slightly downwards ( chart 13 ). you can see the effect of these revisions on 2011 and 2012 year - end inflation forecasts ( table 1 ). bis central bankers ’ speeches esteemed guests, in the july inflation report, the price increases in tobacco products were assumed to be consistent with the inflation target, adding approximately 0. 3 percentage points to inflation. however, considering recent developments, the estimated contribution of price increases of tobacco products to inflation is revised upwards to 0. 9 percentage points. this has led to an increase in short term inflation forecasts by 0. 6 points ( table 1 ). the assumptions about fiscal policy used for medium - term forecasts were based on the outlook presented in the medium term program ( mtp ). therefore, the baseline scenario envisages that the ratio of primary expenditures to gdp would gradually be reduced from 2012, the public debt - to - gdp ratio would continue to fall, and the risk premium would remain broadly unchanged. moreover, tax adjustments and administered prices are assumed to be consistent with inflation targets and automatic pricing mechanisms. distinguished members of the press, as i

of measures intended to contain fluctuations in the foreign exchange market. distinguished guests, ongoing deterioration in the global risk appetite, which started in august, has led to excessive depreciation of the turkish lira. the accumulated depreciation of 30 percent since november 2010 started to pose risks on the inflation outlook. moreover, in october, adjustments made to administered prices, which were far beyond the assumptions of the july inflation report, necessitated a sizeable upward revision of short - term inflation forecasts. at this point, i would like to underline that we would not allow the medium - term inflation expectations and outlook to be affected by these developments, and we will take all necessary policy measures. the policy measures that i mentioned earlier in my speech and the committee decision of october stipulating a significant increase in the overnight lending rate should be viewed from this perspective ( chart 6 ). bis central bankers ’ speeches 2. inflation and monetary policy outlook distinguished members of the press, i would now like to discuss the macroeconomic outlook and the assumptions underlying our forecasts. first of all, i will summarize the recent inflation developments and then i will compare the short - term forecasts we announced in july with data realizations in the third quarter. in the third quarter, prices of core goods posted a more - than - envisaged increase amid excessive depreciation of the turkish lira. the annual rate of change in food prices declined significantly due to the base effect in unprocessed food prices. as seen on the slide, inflation followed a flat course during the third quarter as these two effects largely offset each other ( chart 7 ). however, exchange rate developments ended up being more dominant which led inflation to exceed the forecast range presented in the july inflation report. in the third quarter, exchange rate developments led to an increase in the underlying trend of core inflation indicators as well ( chart 8 ). this was mainly triggered by the increase in prices of core goods, while the underlying trend of services inflation remained relatively modest ( chart 9 ). bis central bankers ’ speeches distinguished guests, gross domestic product ( gdp ) data indicated more robust economic activity in the second quarter of 2011 compared to the outlook presented in the july inflation report. therefore, the output gap estimates of this period were revised upwards. private sector consumption and investment expenditures became the main drivers of growth in this period. while exports followed a weak course amid developments in the global economy, imports recorded a significant decline following the slowdown in domestic demand