##ra and not permitting households to use fx - denominated or fx - indexed loans encourage the private sector to borrow in turkish lira. the foreign exchange net general position arrangement for the banking sector and allowing the issuance of tl bonds by banks in a controlled manner can also be considered in this context. the fourth and last pillar of the policy framework is to promote the risk management concept. in this respect, steps to be taken regarding financial training assume importance for the smooth functioning of the system. we welcome the efforts towards increased recognition of turkish derivatives exchange, more diversified products and more widespread use of forward transactions. in addition, we believe that the floating exchange rate regime that has been in implementation since 2001 has significantly contributed to the embedding of awareness of exchange rate risk. in short, given the current conjuncture, the avoidance of excessive borrowing both by the public and private sector ; preference of longer maturities in all borrowings, opting to borrow in tl as much as possible and managing risks efficiently will considerably strengthen the resilience of turkish economy against external shocks. the monetary policy adopted by the central bank is composed in a way to make price stability and financial stability complementary. in this context, i would like to evaluate how the cbrt will use policy tools in the upcoming period within the framework of possible scenarios provided in the inflation reports. as also demonstrated on the slide, the current conjuncture supports the cbrt ’ s stance of keeping policy rates constant for some time, and at low levels for a long period. on the other hand, developments in the aggregate demand composition necessitated that instruments other than the policy rate be brought to pre - crisis levels. in this respect, we have largely completed the exit strategy measures that we announced in april 2010. in the october inflation report, we stated that our baseline scenario was based on an outlook where domestic demand is stronger compared to the previous reporting period, external demand continues to restrain economic activity, and thus aggregate demand conditions continue to support disinflation, albeit to a lesser degree. this baseline scenario assumes a policy framework that the measures outlined in our exit strategy are completed by the end of the year, and that policy rates are kept constant at current levels for some time followed by limited increases starting from the last quarter of 2011, with policy rates staying at single digits throughout the forecast horizon ( in other words, 3 years ). in this respect, noninterest instruments will be actively used in order to address the risks

exchange rate being among the first contracts to be operative in the turkish derivatives exchange, as well as its significance within the context of risk management, which is the primary function of derivatives markets. as we have emphasized at all times since the first day of the floating exchange rate regime in turkey, under this regime exchange rates are determined by supply and demand conditions. the level of the exchange rate is shaped by economic developments, external shocks, and expectations and fluctuations in the risk premium are applicable to all of them. neither the central bank nor any other authority has any commitment or target whatsoever as regards the level of exchange rate. bank for international settlements ( 2004 ), “ triennial central bank survey of foreign exchange and derivatives market activity in april 2004 ”. chinese proverb. at this point, i would like to underline two points missed by those who held the opinion from the start that the floating exchange rate regime could not be implemented in turkey, as the risk in this regime was too high, there would be too much volatility in the foreign exchange markets, and the economy, especially the foreign trade would be adversely affected as a result of these. the first point is that when fixed or foreseeable exchange rate regimes are implemented - like we did in the past -, in economies similar to our economy, where capital movements are free the exchange rate risk does not disappear, but is assumed by the public sector or by the central banks, as the monetary authority. considered as a whole, in environments where the economy has a relatively fragile structure, further elevated by the loose fiscal policies of governments, this may be even more costly than each economic unit assuming its own exchange rate risk under the floating exchange rate regime. the second point is that the presence of derivatives markets would enable foreign trade firms, under the floating exchange rate regime, to act as if exchange rates were fixed. in other words, with the development and widespread use of derivatives markets, the level of foreign trade would not differ under the floating exchange rate regime from that under the fixed exchange rate regime, and exchange rate risk would cease to be a factor influencing the level of foreign trade5. although these markets are being newly founded in turkey, i would like address a point, which often comes up in international literature and which i believe might arise in turkey in the coming periods. leaving aside the fact that speculative transactions are frequently made in derivatives markets, and especially in the foreign exchange market, these markets are alleged to increase risk and volatility in