Concern about the size of Turkey's current-account deficit and the impact on financial stability of strong capital inflows resulted in a shift in monetary policy in December 2010. Instead of raising rates, as central banks in most booming emerging markets have done, the Central Bank of Turkey cut its key interest rate, the one-week repo (repurchase) lending rate, by 50 basis points in December 2010 and by 25 basis points in mid-January 2011, to 6.25%. Expecting capital flows to emerging markets to ease moderately (the earthquake and tsunami in Japan are expected to halt the yen carry trade), we now think further cuts are unlikely and that by the end of the third quarter of 2011 the Central Bank will have started to raise rates to control inflation. Because of the lower base, they may have to rise more sharply than previously forecast (by 150-200 basis points). We expect that recent increases in banks' reserve requirements will help to curb credit growth, which has fuelled increased spending on imported goods. However, there is a risk that they do not succeed and the current-account deficit continues to rise, requiring much tighter monetary and or fiscal policy. We do not expect the Central Bank to change its consumer price inflation targets, set in agreement with the government on a rolling three-year basis. They are (±2 percentage points) 5.5% at end-2011 and 5% at end-2012 and 2013. The term in office of the current governor, Durmus Yilmaz, expires in April 2011, so the government's choice for the post will be closely watched. We foresee no major change in the operational independence of the Central Bank of Turkey or its conduct of monetary policy in 2011-15.