erdem basci : recent economic and financial developments in turkey speech by mr erdem basci, governor of the central bank of the republic of turkey, at the press conference for the presentation of the january 2015 inflation report, ankara, 27 january 2015. * * * accompanying charts can be found at the end of the speech. distinguished guests, welcome to the briefing held to convey the main messages of the inflation report of january 2015. we have been pursuing a cautious monetary policy stance for a year. we have witnessed some favorable outcomes of this approach. the downward trend in inflation will accelerate starting from this month. therefore, we began cutting policy rates in january. provided we maintain our cautious approach throughout these policy rate reductions, the end - 2015 inflation will likely be the lowest we have seen in the last 45 years. i will now present an overview of the report, which will be published on our website soon. the report typically summarizes the economic outlook underlying monetary policy decisions, shares our evaluations on macroeconomic developments and presents our medium - term inflation forecasts, which were revised in view of the developments in the last quarter, along with our monetary policy stance. in addition to the main text, the report includes seven boxes entailing interesting and up - to - date analyses on various topics. the report presents boxes that analyze the effects of oil prices on consumer prices and the reflection of international grain prices on domestic prices. moreover, there are studies elaborating on the role of base effects on consumer inflation in 2015, the debt dollarization of companies in turkey and their growth performance, the macroeconomic effects of international energy prices and the reverberations of remuneration of required reserves. titles of the boxes are shown on the slide. all of these analyses shed light on noteworthy issues in the turkish economy. i strongly recommend that you read these boxes, which will soon be published on our website. i would like to commence my speech by reviewing the global economic outlook given its undeniable influence on our policies. in the fourth quarter of 2014, due to the persisting divergence among global monetary policies besides uncertainties regarding the normalization process, we saw aggravated volatility in financial markets. this led the portfolio flows towards emerging economies to fluctuate and the volatilities of exchange rates in these countries to increase ( chart 1 ). the persisting deterioration in global economic activity accompanied by mainly supply - side factors has recently pulled down oil prices sharply.

in normal financing ( in fact, 95 percent of external flows to emerging market countries come from the private marketplace ). this cutback, in turn, weakened the external reserve positions of these countries. then the combination of weak reserves and a weak financial sector brought on a liquidity crisis. we are now in a position to draw some lessons from the east asian crisis. first, policy implementation must pursue sound macroeconomic policies in order not to lose the confidence of the markets. and second, four main principles must constantly be kept in mind : • the currency should not be allowed to appreciate, except as part of a bold anti - inflation program. • any short - term international capital flows that occur must be carefully examined to determine their direction and nature. in addition, the ratio of usable external reserves to short - term debt must be kept at reasonable and internationally accepted levels. • weak banking systems have been the most important contributors to past crises. a sound and transparent banking system is an absolute requirement for avoiding future crises. risk - taking strategies should be appropriate to a market system. off - balance - sheet items and cross - border lending should be under tight discipline. an independent supervisory authority is the best guarantee of efficient, sound, and effective banking supervision. • last but not least, the pursuit of sound macroeconomic policies in a low - inflation environment is an essential precondition for building public and market confidence. confidence also requires that both public and private sector institutions be guided by strong, high quality governance and accepted ethical rules. the last point that i want to make is that i disagree with those economists who speak of the difficulty of anticipating the east asian crisis, since these countries had assembled all the ingredients of a perfect crisis recipe : • an appreciated exchange rate ; • a high and worsening ratio of short - term debt to usable foreign reserves ; • untransparent off - balance - sheet items in the banking sector ; • a widening current account deficit ; • steep growth of domestic credits ; • and a continuous decline, during recent years, in emerging markets ’ borrowing spreads without matching improvement in their economic fundamentals. if someone should combine all these elements, it is conceivable that they might succeed in creating a crisis. but the world ’ s financial centers turned away from the existence of this perfect crisis recipe and turned toward the turkish economy, for which, ignoring the developments in east asia, they predicted a crisis during the last couple of years. the turkish economy does not satisfy the perfect