in sum, monetary and financial conditions remained supportive of economic activity in the fourth quarter. accordingly, the credit channel has maintained its expansionary effect on the consumption and investment demand. 3. inflation and monetary policy outlook after summarizing our monetary policy stance and its impacts on the financial markets, i would now like to talk about the financial outlook and assumptions underlying our forecasts. third quarter national accounts data are consistent with the outlook presented in the october inflation report. following the deepening debt crisis in european economies since may, the growth rate of gross domestic product slowed down in the third quarter and displayed an increase of 5. 5 percent year - on - year ( figure 17 ). the largest contribution to annual growth in the third quarter came from private sector demand through consumption and investment ; whereas, due to the contraction in exports and the acceleration of demand for imported goods, the net foreign demand contributed to annual growth negatively. thus, the divergence between domestic and foreign demand growth has become evident ( figure 18 ). bis central bankers ’ speeches recent data releases indicate that the third - quarter slowdown in economic activity is temporary. the composition of economic activity suggests that the divergence between domestic and foreign demand continued in the fourth quarter. domestic demand for imported goods accelerated in the last quarter amid rapid credit expansion and lagged effects of the appreciation of the turkish lira in the third quarter. as a result, the current account balance continued to deteriorate ( figure 19 ). the slow recovery in the global economy continues to restrain economic activity, whereas the strong domestic demand bolsters aggregate demand growth. in fact, the sharp upward trend in private consumption and investment spending that started in the fourth quarter of 2009 continued into the fourth quarter of 2010 ( figure 20 ). continued economic recovery fueled by robust domestic demand has supported the gradual improvement in employment conditions. the rapid recovery in non - farm employment paused in the third quarter of 2010, which appears temporary, as suggested by leading indicators bis central bankers ’ speeches ( figure 21 ). however, due to high labor force participation rates, it will take a while before unemployment rates come down to precrisis levels ( figure 22 ). therefore, it is unlikely for unit labor costs to be subject to cost pressures in coming months. in sum, monetary conditions remained supportive of domestic demand in the fourth quarter. private demand recovered more rapidly amid increased consumption and investment spending, therefore aggregate demand conditions provided less support for disinflation than suggested in the october inflation report

excluding financial sector. we believe that the monetary tightening implemented by increasing in the weighted average of reserve requirement ratios would more than offset the expansionary effects of the interest rate reductions. therefore, we expect that the net impact of the monetary policy decisions we have taken recently will be tightening. despite the volatile global risk perceptions in the fourth quarter, market interest rates maintained their downward trend on the back of downward revisions to future policy rate expectations. accordingly, the benchmark bond rate continued to hover around all - time lows ( figure 11 ). meanwhile, we think that the fall in inflation expectations have contributed to the decline in market rates as well. bis central bankers ’ speeches the decline in market interest rates was more obvious for the shorter maturities during the final quarter, resulting in a steeper yield curve relative to the previous quarter. the cbrt ’ s rate cuts over the last two months caused short - term market rates to fall quickly. on the other hand, longer - term interest rates displayed only a modest decline, since the cbrt did not provide any explicit signal about the future course of policy rates. yet, despite the volatile global risk appetite, long term interest rates remained at historically low levels and relatively stable, reflecting prospects of a prolonged low - interest - rate environment in turkey ( figure 12 ). the decline in nominal market rates also affected real interest rates, as real medium - term rates remained at unprecedented lows ( figure 13 ). bis central bankers ’ speeches after following a similar trend seen across other emerging market currencies in the post - crisis period, the turkish lira has recently taken a different path and experienced a relative depreciation. it is worthy of notice that this divergence started with the rate cut signal in december and has become more obvious after the actual rate cuts ( figure 14 ). factors such as low interest rates across the globe, easy access to external funds, and strong economic activity continued to help improve credit conditions in the final quarter of 2010. as a result, the gap between loan rates and deposit rates remained at historically low levels ( figure 15 ). both the low loan rates and the improved credit risk indicators helped the credit volume continue to expand rapidly ( figure 16 ). as per sub - categories, both household loans and business loans continued to increase rapidly. at this point, i would like to once more emphasize that it is very important to closely monitor the upcoming course of loans and to take necessary macroprudential measures. bis central bankers ’ speeches