Turkey’s central bank on Thursday hiked its year-end annual inflation forecasts for this year as well as the next, while it stressed supporting the lira is a key objective of its ongoing policy review.

The end-2022 consumer price index estimate has been raised to 23.2%, Central Bank of the Republic of Turkey (CBRT) Governor Şahap Kavcıoğlu told a meeting in the capital Ankara to present the bank’s first quarterly inflation report of the year.

In its last report in October, the central bank forecast inflation would ease to 11.8% by the end of 2022. The annual inflation rate stood at 36.08% in December, its highest level in 19 years.

Kavcıoğlu dismissed the notion that a series of interest rate cuts sent prices soaring and the lira declining. He noted that unhealthy price formations in currency markets impacted inflation and this year's forecast had been affected by lira-denominated import prices.

The bank forecast 8.2% inflation for 2023 and a return to its official target of 5% a year later, Kavcıoğlu said.

Data shared by the bank showed it expects inflation to approach 50% in January, peak near 55% in May and then drop sharply in the third quarter, which Kavcıoğlu attributed to the government's new economic strategy.

The bank hiked its year-end food inflation estimate to 24.2%, compared with 13.9% previously, before it drops toward 10% in 2023.

Kavcıoğlu stressed that the bank’s estimate for food prices was revised up with cumulative effects of the ongoing rises in international food prices taken into account, especially the exchange rate developments and the developments in agricultural drought.

The governor said the bank was observing the impact of recent policy rate decisions and was reviewing policy while prioritizing the lira.

The bank has slashed the policy rate to 14% from 19% since September. It kept the benchmark one-week repo rate steady last week.

The de-dollarization of Turkey’s financial system will allow policymakers to curb price growth, and Kavcıoğlu signaled the determination of the officials to support the lira.

He dubbed policies aimed at widening the use of the local currency “liraization,” and said they will limit the impact of currency volatility in prices.

“The stress from foreign exchange rates are having a negative impact on prices in Turkey,” he said. “This distorts pricing behavior and has recently resulted in a divergence between Turkey and the rest of the world.”

President Recep Tayyip Erdoğan last month unveiled a scheme that safeguards lira deposits against volatility in the foreign exchange rates.

The initiative came after the lira fell to a record low of 18.4 to the United States dollar, before rebounding sharply to just over 10 and then settling at current levels just under 14 to the U.S. dollar.

Kavcıoğlu said that the rate of conversion to lira deposit accounts has picked up pace recently and will continue to accelerate.

He said the current level of more than TL 200 billion ($14.70 billion) transferred to the protected accounts since Dec. 20 is in line with projected targets.

In the minutes of this month’s monetary policy meeting, the central bank on Thursday also said it will develop instruments to support lira deposits, increase the share of lira in funding, gradually reduce the volume of swaps and strengthen forex reserves.

It said it is taking the necessary measures about exchange rate stability. It added that disinflation is expected to begin due to recent measures taken, as well as the so-called base effect.

Kavcıoğlu said the bank sets policy based on data when asked at a press conference about its independence.

The lira weakening “has nothing to do with the rate cuts” and would have happened irrespective, said the governor.

He added that rising inflation was not completely due to rate cuts. “We took care of the exchange rate, God willing we will take care of inflation too with these policies.”

Erdoğan, who has long backed the view that interest rates cause inflation, launched a new economic program last year that prioritizes lower borrowing costs, exports, lending and investment.

He late Wednesday harshly criticized private lenders, saying they were attempting to continue exploitation.

In an interview with private broadcaster NTV, Erdoğan urged households to borrow from state banks and help boost production under the new economic policy that he said should protect the economy from speculation.

High loan rates by commercial banks are not justified, given the 14% one-week repo rate, Kavcıoğlu said.

Erdoğan said the government will take steps to relieve the burden of inflation. He also promised new alternative debt issuance for investors.

Kavcıoğlu said the bank continued to build up foreign exchange reserves, blaming the recent drawdown on market volatility, as well as the hard currency needs of the state-owned energy distributor BOTAŞ and other institutions.

He also called on the banking sector to believe in disinflation and act accordingly and said much of the price pressure was down to global supply issues.