If, for instance, the annual interest rate for government bonds is higher for long durations than for short ones, this could be interpreted as the market expecting the repo rate to be raised. One problem when interpreting implied forward rates in this way is that they do not solely measure expectations of the repo rate. They may also contain premiums that can be regarded as compensation  2  BIS Review 6/2007  for differences between securities with regard to duration, credit risk and degree of liquidity. Estimating the size of these premiums can be complicated and can be done in different ways. 5 It is therefore not possible to calculate market expectations of repo rate developments in a clear-cut manner, which may create confusion. Another problem is that the implied forward rates may vary substantially in the short term. The question is therefore when market expectations should be read. A further problem that is sometimes highlighted is that there may be a risk of the central bank allowing itself to be steered by financial market agents when inflation forecasts are based on implied forward rates. 6 Personally, I am convinced that this is not normally any great problem. When we have had a different opinion from the market, we have said so. On these occasions we have also influenced market pricing. This was the case, for instance, with the monetary policy decisions we made in December 2005 and June 2006.
Addressing these challenges, G-20 Summit held in Brazil on 8-9 November 2008, issued a communiqué that included the following statement: “We affirmed our determination to take all necessary steps to foster non-inflationary growth in a stable and sustainable manner according to the needs and available instruments in our respective countries, including through monetary and fiscal policy.” Distinguished Guests, As concerns over inflationary pressures have subsided all over the world, maintaining the smooth functioning of financial system and efficiency of credit markets has become the main priority of policy makers. It will be proper to evaluate the recent developments in Turkish economy in this perspective. BIS Review 144/2008  1  In Turkey, the banking system has been relatively prepared for the current crisis in terms of foreign exchange liquidity. Its foreign exchange short position is also well contained. Foreign exchange position of the public sector is almost negligible. The household sector is net creditor in terms of foreign exchange, while real sector is net debtor. Since securitized products are rarely used in the Turkish banking sector, the ongoing financial turmoil has not put a marked pressure on local banks through that channel. Current account deficit, historically a source of vulnerability for the Turkish economy, is likely to experience a sharp drop in the upcoming period due to correction in commodity prices, slow down in economic activity and depreciation in New Turkish Lira. Still, extraordinary fluctuations in global liquidity conditions have adversely affected Turkey like other countries, which are sensitive to international financial developments.