(Bloomberg) -- Hafize Gaye Erkan is resolute she has the cure for Turkish inflation even after the central bank she leads forecast a dire outlook for consumer prices.

The governor’s second presentation of the quarterly inflation report on Thursday reflected a new reality that’s set in since her appointment in June, after five straight hikes in interest rates that would have been all but taboo under her predecessor.

But as inflation spirals to some of the fastest levels anywhere in the world, Erkan signaled higher rates will still be the centerpiece of her efforts to choke off price increases that the central bank now expects to peak only next May at as high as 75%.

The latest projections unveiled by Erkan showed a new end-2023 estimate of 65%, up from a previous forecast 58%, and forecast price growth will finish next year at 36% in a revision from 33%. 

Speaking at an event in Ankara, Erkan said she expects disinflation from the second half of next year. “Monetary tightening will continue until a marked improvement in inflation,” she said.

The emerging picture for prices explains the urgency of a monetary tightening cycle that’s already more than quadrupled Turkey’s key rate to 35%. Erkan’s bleak assessment means she’ll need to put a further brake on the $900 billion economy, as part of a campaign to reverse the legacy of unorthodox policies under President Recep Tayyip Erdogan.

What Bloomberg Economics Says...

“The Turkish central bank’s revisions to its inflation forecast signal a tighter monetary stance is coming. We expect this to take the form of a higher policy rate, tighter credit conditions and more stringent banking regulations. That’s good news for the struggling currency, but likely to be negative for growth.”

— Selva Bahar Baziki, economist. Click here to read more. 

Erkan, alongside Finance Minister Mehmet Simsek, has been at the forefront of a policy shift since Erdogan installed a new team of technocrats after his reelection in May.

The Turkish leader, a self-proclaimed enemy of interest rates, has previously long championed the benefits of cheap credit and removed three of Erkan’s predecessors in favor of more dovish governors.

But officials are increasingly confident Erdogan is backing their new approach. On Thursday, Erkan rejected the idea of relying on unconventional methods instead of rate hikes in the coming months, as the central bank also stiffens rules for lenders to soak up liquidity among other steps.

“I consider quantitative tightening measures as a comprehensive step that reinforces the effectiveness of rate hikes,” she said. Any “supplementary measures” are announced by the central bank  before or after meetings of its Monetary Policy Council, which she cited as “further evidence of our holistic approach.”

The prospect of a more hawkish tilt didn’t lift the lira, which traded 0.1% weaker against the dollar, the second-worst performance on Thursday among a basket of 31 major currencies tracked by Bloomberg. It’s lost 34% of its value so far this year.

The yield on the government’s 10-year lira bonds rose nine basis points to 28.37%, headed for a record high on a closing basis.

The quarterly inflation report has taken on new prominence because officials now want to tether monetary policy to the projected path for consumer prices, as opposed to the current inflation rate. As attention turns to next year, the inflation momentum has shown little sign of slowing, though price increases are decelerating on a monthly basis. 

In annual terms, price growth is running at more than 12 times the official target and probably accelerated close to 62% in October, according to the median forecast of economists surveyed by Bloomberg. It briefly exceeded 85% last year.

Erkan attributed faster inflation from June to September to “multiple shocks” and said recent tax hikes contributed 2.5 percentage points to the headline rate. The role of excessive domestic demand is now fading, she said, and some indicators for prices in October point to a decline in the underlying trend of monthly inflation.

Investors have meanwhile been calling for a more hawkish stance from the central bank, given that policy rates remain well below zero when adjusted for current inflation. Global lenders like Morgan Stanley and JPMorgan Chase & Co. see Turkish hikes peaking only when the benchmark reaches 40%-45%. 

Officials like Simsek have in turn argued they are focusing on the differential between deposit rates and expected inflation over the next 12 months, which indicates policy is already tighter than it appears otherwise. 

Erkan said on Thursday the steps taken so far are beginning to pay off. Stronger demand for the lira and the stabilization of domestic demand are among factors already putting a lid on prices, she said.

Looking ahead, she said it’s important to maintain deposit rates at levels higher than household expectations for inflation, during what she describes as Turkey’s “transition period” before a turnaround in prices.

“We are determined to establish disinflation in 2024 by weakening the underlying trend of inflation further through the cumulative effects of our monetary tightening steps,” she said.

--With assistance from Baris Balci and Patrick Sykes.

©2023 Bloomberg L.P.