Turkey's central bank raised its inflation forecasts for this year and next on Thursday, citing weakness in the lira currency and higher global oil prices while hinting it may tighten monetary policy further.

At a news conference announcing its quarterly inflation report, the bank raised its mid-point forecast for the end of 2013 to 6.8 percent from 6.2 percent, and for the end of 2014 to 5.3 percent from 5 percent.

It said the forecasts were based on an expected oil price of $109 a barrel for 2013, up from a prediction of $107 in its last report in July. It held its forecast for annual food price inflation at 7 percent.

While Governor Erdem Basci said the bank would tighten policy further if need be, he emphasised several times that easing was not an option for the foreseeable future.

"Inflation-focused monetary policy continues, so don't expect easing until we are near the inflation target," Basci said.

Turkey had been among the most high-profile victims of the shift in global capital prompted by signals the U.S. Federal Reserve would rein in its ultra-easy monetary policy, causing the lira to hit its weakest ever level on Sept. 5.

A retreat from the Fed has given it some room to breathe and Basci said inflation was likely to be volatile in the short term but is on a downward trend and would fall into line with its target of 5.3 percent by the fourth quarter of next year.

But he said the bank would tighten further if needed and said the lira currency could strengthen if the bank maintains it cautious stance. The bank may announce measures in December which would boost the predictability of its policies, he said.

"The most important detail in Basci's comments is that policy will be tightened," said Gizem Oztok Altinsac, chief economist at Garanti Securities.

"There will be no easing in policy, but he left the door open for more tightening. Therefore its likely that there will be new tightening measures to come to support the currency."

Basci said he saw no current need to adjust the bank's interest rate corridor and that the weakness of the lira would add 0.4 percentage points to inflation at the end of 2013.

SLOWDOWN

Turkey's economy, one of the developing world's most robust performers over the past five years, has slowed sharply this year and the bank is under pressure to do more to support growth.

But it has a huge current account deficit to contend with which makes moves in the lira - and foreign capital out of Turkey - disproportionately important for its financial stability.

One positive indicator was Basci's comment that loan growth was running at around 25 percent in the third quarter, above the bank's reference rate, though he said that would fall gradually to more moderate levels.

The central bank kept its main policy rate, the one-week repo rate, at 4.50 percent, its borrowing rate at 3.50 percent and its overnight lending rate at 7.75 percent last week.

It said it will maintain its cautious monetary policy stance and continue implementing additional monetary tightening at the appropriate frequency until the inflation outlook is in line with medium-term targets.

The lira stood at 1.9885 against the dollar by 1016 GMT, having eased to near the 2 lira level before the bank's news conference, and compared with 1.9875 late on Wednesday. – Reuters