The bank raised its inflation forecast for 2012 to 7.4 percent from 6.2 percent, and for 2013 to 5.3 percent from 5.1 percent, still stubbornly above its 5 percent medium-term target, but said core inflation was on a downward trend.
It promised more predictability in its moves to bolster domestic demand in 2013 after pursuing a complex policy mix which, while helping to achieve a desired soft landing this year, has in the past sometimes wrong-footed the market.
The bank has been cautiously easing monetary policy since July to try to stimulate domestic demand, providing more lira liquidity to the banking system and cutting its overnight lending rate. But it has tried to avoid stoking inflation.
"In 2013 we plan to increase the predictability (of our monetary policy) while protecting the flexibility. One pillar of this is the size of our moves. We will take smaller moves," Governor Erdem Basci told a news conference.
The central bank has cut its overnight lending rate - the upper boundary of the interest rate corridor it uses to control monetary conditions - by 200 basis points to 9.5 percent since September to try to support growth.
The bank has also provided cheaper liquidity over the past four months, with its average lira funding rate - the cost to lenders of borrowing from the central bank - falling to near 6 percent now from around 10.5 percent in June.
Basci said the bank may lower its average one-month lira funding rate to as low as 5.5 percent from around 5.75 percent.
"The continued fall in funding costs will positively effect the bond market.
The fall in short-term bond yields in particular will continue," said Tufan Comert, strategist at Garanti Securities.
Bond yields have fallen over the past four months.
The yield on Turkey's two-year benchmark bond was at 7.16 percent at 1020 GMT, from above 9 percent in early June.
"People were talking about a fall of 1-2 percent in yields, from now on they will talk about falls expressed by basis points. Our moves will be measured and small and will support predictability," Basci said.
SLOWER CUTS
Turkey was the fastest-growing economy in Europe last year, expanding 8.5 percent, but the government last week trimmed its forecasts for growth in 2012 to 3.2 percent and forecast only a mild pick-up next year, with domestic demand still weak.
Tighter monetary policy in late 2011 and early 2012 helped bring down the country's high current account deficit and inflation without throwing it into a sharper economic slowdown, but the policy was not always predictable.
Despite high inflation, it made a surprise 100 basis point cut in its overnight lending rate in February, pointing to an easing of lira weakness and a surging current account deficit as giving it more room to spur growth.
Basci said growth would pick up in the fourth quarter and inflation would fall more sharply, although tax hikes on cars, fuel and alcohol as well as rises in electricity and gas prices would continue to have an impact on the October figure.
"The most fundamental development necessitating a revision in inflation forecasts has been the recent tax hikes and energy price adjustments," the governor said.
Turkey raised some consumption taxes last month as it tries to reduce a budget deficit forecast to miss the government's target of 1.5 percent of output. Gas and electricity prices also rose some 10 percent at the start of the month.
Food prices drove inflation higher in September, a supply side shock to prices that the central bank has so far put aside in easing monetary policy, with the consumer price index rising 1.03 percent month-on-month.
Basci said the core "H" and "I" inflation indicators, the most closely watched by the central bank when determining its monetary policy, were continuing to fall and may even drop below five percent if the lira exchange rate remains stable.
The core "H" measure excludes unprocessed food, energy, alcohol, tobacco and gold from consumer prices, while the "I" measure also strips out non-alcoholic beverage prices.