durmus yilmaz : press conference for the presentation of the inflation report press conference by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the presentation of the inflation report, ankara, 29 april 2010. * * * distinguished guests and members of the press, welcome to the press conference held to convey the main messages of the april 2010 inflation report, one of the most important communication tools of the inflation - targeting regime of the central bank. 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 on the inflation outlook and economic activity, which i will share with you in detail shortly, i would like to summarize the current global conditions. the recovery in global economic activity and the normalization of the international financial system have continued during the first quarter of 2010 ( figure 1 ). however, distressing levels of government debt, lingering problems across credit markets, and high levels of unemployment rates, all suggest that completely resolving problems across developed economies is not likely over the near term ( figure 2 ). although the recovery across developing economies seems to be stronger, ongoing problems across developed economies – with their prominent role in global trade – still create downside risks for developing economies. moreover, constraints related to external finance remains as a potential factor that might delay the recovery in many developing economies. notwithstanding the lingering uncertainties regarding medium - term growth, developing economies faced inflationary pressures stemming from a relatively rapid rebound in economic activity, base effects, and ongoing increases in commodity prices. in this regard, inflation dynamics in developed and developing countries have started to decouple since the first quarter of 2010 ( figure 3 ). this decoupling is more pronounced in core inflation ( figure 4 ). 1. inflation developments the inflation outlook in turkey changed in line with the developments i have just mentioned pertaining to developing countries. however, in addition to these factors, the rise in inflation can largely be attributed to the high - rates price increases linked to the january tax hikes in fuel, alcoholic beverages and tobacco products. moreover, the rate of change in unprocessed food prices also led the rise in inflation in turkey to be relatively more pronounced. therefore, annual consumer inflation continued to rise and pushed inflation up by

in the third quarter ( figure 34 ). inflation is expected to drop significantly in the last quarter of 2010 and the first quarter of 2011 ( figure 34 ). the fall in the last quarter of 2010 would reflect the base effects caused by the indirect tax hikes and the sharp increases in food prices that occurred during the last quarter of 2009. similarly, the impact of the tax hikes, which added around 1. 9 percentage points to headline inflation in the first quarter of 2010, would largely disappear during january and february of 2011. accordingly, inflation would fall to 8. 4 percent at end - 2010, and display a significant drop during the first quarter of 2011, converging to levels consistent with the targets ( table 3 ). afterwards, with the transmission of the lagged impact of the envisaged monetary tightening, inflation is expected to further decline and stabilize at around 5 percent over the medium term. the projection that inflation would remain at elevated levels – albeit temporarily – over the forthcoming period, highlights the importance of expectations management. as of april, medium - term inflation expectations are significantly above the revised inflation forecasts ( table 3 ). in this respect, it is critical that economic agents, with an awareness of temporary factors, focus on medium - term inflation trends, and therefore, take the inflation targets as a benchmark for their pricing plans and contracts. at this point, i would like to emphasize once more 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 particularly highlight that assumptions regarding future policy rates underlying the inflation forecast should not be perceived as a commitment on behalf of the cbt. 4. risks in the last part of my presentation, i would like to talk about 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. the fact that inflation will remain elevated for some time warrants the close monitoring of price setting behavior. the combination of several unfavorable developments, such as unprocessed food and oil price increases, administered price hikes and base effects has led to a significant increase in inflation since the last quarter of 2009. although these factors are temporary, they cause headline inflation to significantly exceed the inflation target, leading to an adverse impact on inflation expectations. apart from items that are directly affected by cost push effects, current pricing behavior does not reveal any deterioration to the extent that might endanger