The Central Bank of Turkey has raised its forecast for 2014 year-end inflation to 6.6% from a previous forecast of 5.3%.

The Bank unveiled its regular Inflation Report on Tuesday.

Inflation is expected to be, with 70% probability, between 5.2% and 8% (with a mid-point of 6.6%) at end-2014 and between 3.1% and 6.9% (with a mid-point of 5%) at end-2015, the Bank said. The 2014 forecast is well above the Bank’s target rate of 5%.

Inflation is expected to stabilize around 5% in the medium term, according to the Report.

0.3 percentage points of this revision stemmed from the upward revision of the year-end food inflation assumption, tax adjustments will add around 0.5 percentage points to year-end inflation and exchange rate developments are expected to add around 0.5 percentage points to year-end inflation, the Report said.

Here are the highlights from the Central Bank’s latest Inflation Report:

INFLATION:

If the domestic uncertainty remains elevated for a long time, the exchange rate depreciation may put additional pressure on inflation in the upcoming period, while aggregate demand conditions may put downward pressure on inflation amid the rise in risks and market rates.

The 2014 outlook for core inflation indicators may change based on the pass-through rate of tax hikes on final prices as well as the course of exchange rates and economic activity.

DEMAND:

Private sector demand is expected to recede in the first quarter amid the fall in expenditures for durable consumption goods and investment which are sensitive to the exchange rate, financing conditions and confidence. Domestic demand developments are expected to partially contain the recent cost-push pressures on prices. The growth rates of personal loans and credit card debts are expected to continue to slow down in the forthcoming period thanks to the macroprudential measures taken by the Banking Regulation and Supervision Agency (BRSA).

ENERGY COST, FOOD INFLATION & CA DEFICIT:

The real depreciation of TRY will support the improvement in current account (CA) balance. The exchange rate movements that appeared due to external developments since the publication of October Report is assumed to add 0.5 percentage points to the end-2014 inflation forecast. Given the recent negative movements in food prices and historical averages, the assumption for the rate of increase in food prices for end-2014 was revised up as 8%. This revision pushed the end-2014 inflation forecast upwards by around 0.3 percentage points.

TAX ADJUSTMENTS

Tax adjustments introduced to automobile and tobacco prices in early January is expected to add around 0.5 percentage points to the year-end inflation in 2014. It is assumed that no additional arrangement will be made to these prices in the rest of the year, while electricity and natural gas prices will display increases consistent with the inflation target.

The central bank will use all instruments at its disposal to prevent a deterioration in inflation, the Bank’s governor Erdem Basci said on Tuesday.

The late timing of an extraordinary policy meeting on Tuesday is in order to allow a member of the monetary policy committee to return from the U.S, Basci explained. Basci also ruled out capital controls.

A Reuters poll of 31 economist show that the Central Bank is expected to raise its overnight lending rate by 225 basis points to 10% at its first extraordinary monetary policy meeting.

The Central Bank said on Monday that its monetary policy committee (MPC) would meet Tuesday evening to discuss recent developments and take the necessary policy measures for price stability.

The decision will be announced at 24:00 and the press release will be posted on the Bank’s website.