Durmuş Yılmaz: Recent economic and financial developments in Turkey Speech by Mr Durmuş Yılmaz, Governor of the Central Bank of the Republic of Turkey, at the press conference for the presentation of the Inflation Report, Ankara, 25 January 2011. *  *  *  Distinguished Guests and Members of the Press, Welcome to the press conference held to convey the main messages of the January 2011 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. The report contains eight boxes written in the light of completed and continuing research projects conducted under the aegis of the Central Bank. These boxes include detailed analyses on issues affecting our policies. Considering the extraordinary significance of developments in the global economy for our policies, one of the boxes where the developments in the euro area and the USA are analyzed explains the sensitivities of the peripheral economies of the euro area against the debt crisis. On the other hand, in the second box the reasons for the increase in long-term nominal bond yields in the USA following the second round of quantitative easing is discussed. Besides, two more boxes were prepared aiming to elucidate domestic inflation dynamics. While the first of these examines the reasons for volatility in unprocessed food prices, the second box offers an assessment of Core inflation indicators.
Exceptionally loose monetary policies adopted by advanced economies to eliminate the downside risks on economic activity not only boosted global liquidity but also stimulated the search for yield, which encouraged more capital flows into emerging economies. Moreover, the weak recovery in developed economies – Turkey’s main export destinations, dampened foreign demand growth (Figure 2). Low interest rates across the globe, soaring imports driven by strong credit growth amid increased short-term capital inflows, and weaker foreign demand caused the current account deficit to widen rapidly in 2010. All of these developments prompted the CBRT to adopt a strategy, which partly targets financial stability besides the main objective of price stability, parallel to the conditions referred to as the “new normal”. In this context, as stated previously, the CBRT has actively begun to use tools such as required reserves and liquidity management, in addition to the one-week repo auction rate, the main policy instrument. 1. Inflation developments  Having summarized the global economic conditions and the implications of this outlook on the monetary policy, I would now like to inform you about the inflation developments of the last quarter. As you will recall, we underlined in the October 2010 Inflation Report that the increases in unprocessed food and tobacco prices – which are beyond the immediate control of the CBRT – added about 5 percentage points to annual inflation, and suggested that these items would leave sizable room for disinflation. Indeed, inflation dropped by 2.83 percentage points, yielding a rate of 6.4 percent, meeting the year-end inflation target.