Seasonally adjusted data suggest that prices of services recorded a quarter-on-quarter drop for the first time since the inception of the index. While this development was attributable to the sizeable fall in communication services, the rate of increase in other subcategories of services also slowed down (Figure 12). Specifically, annual rental inflation continued to fall steadily to an all-time low during the second quarter, which is a dramatic development (Figure 12). 4  BIS Review 133/2010  Prices of core goods excluding food, energy, alcoholic beverages and tobacco and gold, moderated in this quarter owing to euro depreciation as well as easing commodity prices (Figure 13). In line with these developments, core inflation indicators also declined in the second quarter (Figure 14). The downward trend in underlying inflation is also apparent in the recent course of seasonally adjusted data (Figure 15). It should be pointed out that the tax incentives in 2009 will put downward pressure on the annual rate of increase in core price indicators during July and October and that we expect core inflation indicators to remain consistent with medium-term targets in the upcoming period. BIS Review 133/2010  5  Accordingly, the uptrend in medium-term inflation expectations that started in the final quarter of 2009 slowed during the second quarter of 2010 (Figure 16). In fact, following the betterthan-expected price developments during May and June and the return of annual inflation to single digits, near-term inflation expectations were revised down markedly quarter-on-quarter (Figure 17).
However, current inflation expectations for 12 and 24-months ahead hover slightly above year-end targets of 5.5 and 5 percent for 2011 and 2012, respectively. 2. Monetary policy response  After commenting briefly on inflation developments, I would now like to cover the policies pursued by the Central Bank during the last quarter. Anticipating that inflation would decrease sharply following the last quarter of 2008, the Central Bank of Turkey (CBT) focused on alleviating the potentially harsh impact of the global financial crisis on the domestic economy. In this respect, the CBT has delivered sizeable cuts in policy rates, while providing liquidity support to facilitate the smooth operation of credit markets. Accordingly, policy rates have been cut by 1025 basis points since November 2008 (Table 1). Considering the favorable developments in credit markets and the moderate recovery in economic activity, the Monetary Policy Committee (the Committee) ceased policy rate cuts in December 2009. Notwithstanding the rapid increase in inflation during the last quarter of 2009 and the first quarter of 2010, I would like to remind you that the Committee, highlighting the persisting downside risks regarding the global economy and the consistency of core inflation indicators with the medium-term inflation targets, expressed that policy rates would stay at low levels for a long period.