Rising concerns regarding the debt sustainability of several Southern European countries have caused risk appetites to follow a volatile and downward trajectory, which in turn, have triggered capital outflows from emerging markets and increased risk premiums. While risk premium indicators particularly in some European countries have increased, during this period, increases in emerging market risk premiums – especially in Turkey – have been limited (Figure 3). BIS Review 133/2010  1  Sovereign debt-related problems in Europe have once again confirmed that downside risks regarding the global economy activity remain. This development led many central banks to adopt a monetary policy stance with an increased emphasis on downside risks, especially in advanced countries. Accordingly, central banks of advanced economies have underscored that the current monetary policy stance would be kept accommodative for a long period, while emerging economies have also adopted similar changes in their rhetoric through policy statements. These developments have postponed the expectations regarding the timing of policy normalization (Figure 4). 2  BIS Review 133/2010  According to this outlook, year-on-year inflation in consumer prices was flat in both advanced and emerging economies during the second quarter of 2010 (Figure 5). In the meantime, core inflation continued to diverge between both groups of economies (Figure 6). 1. Inflation developments  After summarizing current global conditions, I would now like to make an evaluation of the inflation developments in Turkey that took place in the last quarter.
Let us remember that, for example, in Bulgaria the inflation rate had topped 1,000 percent and the economy was in shambles. The introduction of the currency board was the solution which, at unavoidable social costs, brought the Bulgarian economy afloat, with inflation falling steeply and staying close to EU levels for a good couple of years. But the currency board has its limits and constraints. The BNR has constantly opposed the adoption of such a system by Romania given these limits and constraints. Actually, a country adopting the currency board is deprived of monetary policy and thus the central bank becomes a sort of an institute for statistics. Instead of a two-pedal vehicle – monetary and fiscal policies – the economy of currency board countries has only one pedal left, namely the fiscal policy. Assuming the risk of an extended comment, let us look at what happened in the four countries and what happened in Romania in the past few years in a rather unusual international context, with the euro appreciating simultaneously with the increases in farming products and energy prices. The appreciation of the euro triggered a slide of output competitiveness in the countries having their exchange rate pegged to the euro and the rises in global prices boosted domestic inflation. Currency board countries could change neither the exchange rate, nor the interest rates which are linked to euro area levels, currently standing at 4.25 percent a year.