Turkish central bank seen shying from rate hike
* Most analysts expect main rates to stay unchanged
* Central bank to announce decision at 1200 GMT
* Lira near record low
By Daren Butler
ISTANBUL, Jan 21 (Reuters) - Turkey's central bank finds itself caught between economic reality and political pressure as it meets to decide on interest rates on Tuesday, with most economists expecting it to shy away from the decisive rate hike investors are crying out for.
The bank faces heavy market pressure to raise rates and defend a sliding lira but is fearful of restricting growth, with a combative Prime Minister Tayyip Erdogan - already battling a corruption scandal - bent on maintaining his reputation for economic management ahead of elections this year.
The lira hovered near record lows in early trade, easing to 2.24 against the dollar, with investors concerned that a lack of decisive central bank action could cause further losses in a currency which tumbled 17 percent last year.
On the eve of the decision, Erdogan, who has railed against high interest rates, played down the turbulence in Turkey's financial markets, saying it was temporary and describing outflows in recent weeks as "trifling".
"The outflow of money from Turkey is not at the point that it would cause trouble. Those are trifling numbers," Erdogan told reporters on Monday night before leaving on an official visit to Brussels.
"Turkey is in a position to comfortably absorb this."
The new economy minister, Nihat Zeybekci, put it more bluntly on Monday, saying he saw no risk from the lira's current volatility and the central bank should not raise rates.
"Given rhetoric from the government's economic team over the past week I would be very surprised to see any move in key benchmark policy rates in Turkey," said Timothy Ash, head of emerging markets research at Standard Bank.
"Any such move would likely be viewed as a surrender by the administration to the so-called interest rate lobby," he said.
Erdogan and his ministers have repeatedly criticised what they call an "interest rate lobby" of speculators pushing for higher rates, saying they are trying to destabilise Turkey's economy and damage its standing in the world.
The corruption scandal, which broke a month ago with the arrest of businessmen close to the government and has led three ministers to resign, has further hit appetite for Turkish assets, compounding concerns about cuts to U.S. stimulus that has flooded Turkey and other emerging markets with cheap cash.
Erdogan has cast the graft investigation as a foreign-backed plot to undermine him ahead of local elections in March and a presidential race in August, in which he is expected to stand.
The Federal Reserve's plans to gradually withdraw help for the U.S. economy have meanwhile raised the prospect of higher U.S. yields, encouraging investors to pull back from emerging markets. Turkey, dependent on foreign capital flows to finance its gaping current account deficit of around 7 percent of national output, is particularly vulnerable.
A Reuters poll of 24 economists last week forecast that the central bank will have to increase its overnight lending rate by a full percentage point to 8.75 percent by the end of March to shore up the lira.
But in a separate poll, only five out of 15 expected the bank to make any move on the lending rate on Tuesday, its first monetary policy meeting of the year.
In a note to clients, Finansbank said it expected all main interest rates to be left unchanged on Tuesday but did not rule out the possibility of a measured overnight lending rate hike.
"Such a timid step, unless it is coupled with very forceful rhetoric, would fall way short of providing yield support for the lira and it might even foster the impression that the central bank is out of touch with market concerns," it said.
The lira has weakened almost 10 percent since mid-December when the corruption scandal shaking the government first erupted. It hit a record low of 2.2515 on Monday.
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