durmus yilmaz : recent economic and financial developments in turkey speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the press conference for the presentation of the inflation report, ankara, 26 october 2010. * * * distinguished guests and members of the press, welcome to the press conference held to convey the main messages of the october 2010 inflation report. the report typically summarizes the economic framework addressed in monetary policy decisions, elaborates global and domestic macroeconomic developments and presents the medium - term inflation forecasts, which have been revised in view of previous quarter developments, along with the monetary policy stance. before moving on to the central bank ’ s assessments of inflation outlook and economic activity, which i will share with you in detail shortly, i would like to summarize the current global conditions that continue to be determinant of the domestic economic outlook. data released in the third quarter indicate that the recovery will be quite slow and gradual albeit a second contraction in global economic activity is not very probable. the marked decoupling between the developed and developing countries in terms of growth dynamics persisted through the second quarter ; where global growth continued to be driven by developing countries ( figure 1 ). meanwhile, the persisting negative outlook in the labor markets of developed countries confirms the slow pace of rebound in these economies on one hand ; and leads us to believe that the improvement in employment conditions will take a long time, on the other ( figure 2 ). parallel to the weak outlook in economic activity, core inflation indicators in developed countries maintain their historically low levels in the third quarter of 2010 ( figure 3 ). in line with the outlook i have summarized, the probability that many developed economies, which are already pursuing exceptionally loose monetary policies, would adopt a second phase of monetary easing has increased. this has strengthened the investors ’ inclination towards risky assets and therefore has boosted capital inflows to emerging markets, leading to currency appreciation in these countries accompanied by marked increases in commodity prices. ample global liquidity and accelerated capital flows that are driven by the increasing search for yield have affected many emerging markets, including turkey. favorable developments specific to turkey have further exacerbated these effects. in particular, a better - than expected recovery in economic activity, indications of a possible upgrade from credit rating agencies, an ease of political uncertainty with the completion of the referendum process, and the signal given by the updated medium term program ( mtp ) that the fiscal discipline

engaged in the review of such regulation and supervision. reflecting the globalization of finance, there is a growing tendency for the broad framework of financial regulation and supervision to be determined in international discussions. the bank, together with the financial services agency ( fsa ), has been taking part in discussions on financial regulatory and supervisory reform at various international forums such as the basel committee on banking supervision and the financial stability board, and i myself have been attending many of those forums. given that a robust global financial system is in the common interest of all countries, i believe it is critical for each country to contribute to the construction of internationally consistent rules and to establish a regulatory and supervisory framework that properly reflects differences between countries, such as in their financial structure. the bank will continue to make contributions in these areas. when comparing systems to ensure financial system stability immediately before the recent crisis from a central bank ’ s point of view, countries can be divided into two groups. in one, which includes the united states, italy, the netherlands, and many asian countries, regulation and supervision was carried out by the central bank, either alone or in cooperation with other authorities. in the other group, which includes the united kingdom and australia, the central bank was not involved in regulation and supervision. japan could be regarded as falling in between these two groups : the bank of japan does not have regulatory authority over financial institutions, but, as mentioned earlier, based on provisions in the bank of japan act, it conducts on - site examinations of financial institutions and provides various kinds of advice and guidance when the need arises. financial regulatory and supervisory systems around the world have been decided upon reflecting differences in countries ’ financial structure, stage of economic development, and historical background, and thus there is no uniform set - up that is correct for all countries. be that as it may, the recent crisis has shown clearly that it is indispensable for central banks to be involved in one form or another in ensuring the stability of the financial system and that central banks should play a significant role in the area of macroprudential supervision. here in japan, we have a system where the fsa, which is in charge of financial administration dealing with regulation and supervision, and the bank of japan, which is the central bank, cooperate with each other and each fulfills its respective functions to ensure the stability of the financial system. while it seems fair to say that japan ’ s financial system has remained relatively stable compared with those of the united states and europe