durmus yilmaz : press conference for the presentation of the inflation report speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the press conference for the presentation of the second issue of the inflation report, central bank of the republic of turkey, ankara, 30 april 2008. * * * distinguished guests and members of the press, welcome to the press conference for the presentation of the second issue of the 2008 inflation report, one of the most important communication tools of the full fledged inflation targeting regime that we have been implementing. in this conference, i would like to give you a short summary of our evaluations and the central bank ’ s inflation forecasts in the inflation report which will be posted on our website later today. 1. inflation developments dear members of the press, i would like to start with a general assessment of inflation developments. the monetary tightening exercised since mid - 2006 has been successful in achieving a significant reduction in underlying inflation. the fall in headline inflation, however, has been more limited, owing mainly to factors largely beyond the control of monetary policy, such as developments in food, energy, and administered prices. consumer prices rose by 3. 1 percent in the first quarter of 2008 and annual inflation reached 9. 15 percent ( figure 1 ). thus, as of march, annual inflation exceeded the upper limit of the uncertainty band, which was 9. 1. figure 1 : annual cpi inflation and target path 12 / 08 09 / 08 06 / 08 03 / 08 12 / 07 09 / 07 06 / 07 03 / 07 12 / 06 09 / 06 06 / 06 03 / 06 12 / 05 annual cpi inflation target path uncertainty band source : turkstat, cbt. prolonged increases in food, energy and commodity prices have recently led to upward pressure on headline inflation and in turn to upward revisions in inflation forecasts in many countries across the world. turkey is not an exception in this regard, as the deviations of inflation from our forecasts can be mostly attributed to these factors. for instance, our forecasts in the october 2006 inflation report suggested that inflation would converge to the 4 percent target at the end of the first quarter of 2008. the forecast was based on a scenario in which food inflation moderated to levels comparable with medium term targets and oil prices remained stable at 60 usd per barrel. however, oil prices continued to rise and averaged around 100 usd per barrel in the first quarter of 2008. moreover, annual food price

announced our exit strategy on april 14, 2010, which encompasses the withdrawal of crisis measures and the normalization process of the monetary policy. unlike other emerging economies, turkey entered the global crisis with a strong and well - regulated banking system as well as a flexible and efficient liquidity management tailored to previous crisis experience. hence, our balance sheet deteriorated only slightly due to anti - crisis measures and we were not forced to adopt radical measures during the crisis. thus, our exit strategy was simple compared to those of many other central banks. 39. as part of the exit strategy and also considering the favorable developments in credit markets and the recovery in economic activity, the cbrt started to withdraw the temporary liquidity measures introduced during the crisis. hence, the excess liquidity provided to the market was gradually drained in tandem with the normalization process. moreover, as the first step of the technical rate adjustment process, the 1 - week repo rate was adopted as the key policy rate in may. 40. euro area sovereign debt problems starting from may 2010 led to renewed uncertainties regarding external demand. this outlook confirmed our projection that policy rates should be kept at low levels for an extended period. hence, the monetary policy stance was maintained and policy rates were held fixed at low levels throughout may - august 2010. bis central bankers ’ speeches 41. after necessary conditions to implement the second step of the technical rate adjustment process within the exit strategy were attained, overnight interest rates were reduced by 25 basis points in september 2010. with the completion of the gradual technical interest rate adjustment process in line with the exit strategy, 1 - week repo auctions have been the main funding instrument of the cbrt. however, with other short - term lending and borrowing options being granted overnight and in order to harmonize maturities of similar liquidity management tools, it was decided that the repo facility, which was extended to primary dealers within the open market operations framework, would only be available at overnight maturity starting from october 15, 2010, and 3 - month repo auctions were terminated. 42. furthermore, with the objective to bring foreign exchange liquidity facilities orderly and gradually back to pre - crisis levels as part of the exit strategy, the foreign exchange reserve requirement ratio was raised by a total of 2 percentage points to 11 percent with the adjustments in april, july and september. moreover, in view of the improved international liquidity conditions and the increase in foreign exchange liquidity of the banking system, our bank has terminated its intermedia