of my speech, let me turn to financial stability in turkey and the monetary policy we have started to implement in the aftermath of the global financial crisis. turkey used to be among emerging economies with high volatility and particularly sensitive to global risk perceptions throughout the 1990s and early 2000s. however, this time the headwinds from the global crisis has remained relatively subdued thanks to the resilience of the financial system and prudent macro policies. of course, the growth rate of the economy has dropped sharply, but neither price nor financial stability has been seriously jeopardized. in fact, turkey was one of the few emerging countries that ended up with higher credit rating than pre - crisis level. a combination of several factors made the difference, but lack of excessive borrowing turned out to be the key. unlike its peers, the leverage ratios in turkey stayed at moderate levels bis central bankers ’ speeches during the period of excess global liquidity, thanks to prudent policies of the banking regulatory and supervision agency and the central bank of turkey. in fact most of those policies implemented in turkey since 2002 are incorporated into the basel iii principles, such as countercyclical buffers ( banks in turkey are not permitted to expand unless their ratio is at least four percentage points above the legal minimum ) and liquidity ratios ( both in local and foreign currency ). debt level of the public sector was also reduced significantly thanks to a quite ambitious fiscal discipline. the real strength of the economy, however, came from the management of foreign exchange risks, which is the most critical aspect of a small, open economy. thanks to prudent regulations and oversight, the overall fx position of the turkish banking sector was balanced. households carried a long position in fx, limiting their exposure to curreny shocks. although the corporate sector carried a significant fx position, their debt was mainly in long term. all these factors contributed to the resilience of the turkish economy to the global crisis, which in turn provided ample space to the central bank of turkey to implement front - loaded and aggressive monetary easing without compromising price stability objective. no rescue package was needed to support the banking system. thus, the government was able to enact modest but still quite effective counter - cyclical fiscal policies in the midst of global turmoil. since early 2010, due to anemic growth in external demand, current account balance has been deteriorating rapidly, whereas core inflation remains subdued and output gap persists. recent surge in capital flows toward emerging

* end - year inflation targets uncertainty band for 2009 2009 ic in b elirs iz lik a ralıgı y ıl s onu e nflas y on hedefleri control horizon kontrol uf ku yuzde - 1 - 3 - 5 - 7 - 9 * indicates a confidence interval of 70 percent while better than expected outcomes in food prices necessitated a downward revision in food inflation for end - 2009, this effect was offset for the medium term by the upward revision of the assumptions for global economic activity and oil prices, and therefore, there has not been a major change in our forecasts for 2010 and 2011. the revised forecasts indicate that the output gap will not close soon, supporting disinflation even when policy rates are kept at low levels for an extended period. it is worthy to note that the sharp fall in inflation in the first half of 2009 created significant base effects. this would, ceteris paribus, lead to volatility and some mild increases in annual inflation rates until mid2010 ( figure 35 ). afterwards, as the impact of tax hikes and price adjustments would gradually disappear, inflation is expected to trend downwards starting from the second half of 2010, stabilizing around 5 percent over the medium term. it is critical to note that inflation would be less persistent, and thus economic recovery much smoother, should economic agents take these forecasts as a benchmark in their pricing decisions. it should be emphasized that any new data or information regarding the inflation outlook may lead to a change in the monetary policy stance. therefore, i would like to underline that the assumptions on the future policy rates underlying the inflation forecast should not be perceived as a commitment on behalf of the cbrt. 4. risks distinguished members of the press, in the last part of my presentation, i would like to mention the risks with respect to the inflation outlook in the upcoming period and provide some information pertaining to the probable monetary policy strategy should these risks materialize. although recent data releases indicate that the worst is over, concerns regarding the health of the global economy remain. in particular, ongoing problems in credit and labor markets keep the downside risks for global activity on the agenda. should the global conditions deteriorate again and consequently delay domestic recovery, the cbrt would consider another cycle of rate cuts. the fact that the crisis itself and policy responses are unprecedented in recent history poses risk to the inflation and monetary policy outlook. it is