UPDATE 2-Turkey could cut rates this month if inflation falling - Basci
* Basci says rate cut being priced in by market
* Could be reviewed this month, depending on inflation
* Vows to bring inflation to 5 pct by end of next year (Adds quotes, details on inflation outlook, market reaction)
By Asli Kandemir
KONYA, Turkey, June 16 (Reuters) - Turkey's central bank could cut interest rates as soon as next week if it is convinced that the outlook for inflation is improving significantly, Governor Erdem Basci said on Monday.
He said that economic growth was on track and that Turkey's current account deficit - its main economic weakness - would narrow "swiftly" this year as the economy keeps rebalancing.
"A cautious, measured, gradual rate cut process is being priced in. We are observing it in long-term rates, as long as the confidence in the central bank reducing inflation continues, as long as it's being observed in long-term rates, we will do it," Basci told business leaders in the central city of Konya.
"But we will do it with caution, without upsetting the balances, without destabilising," he added.
Basci asserted the bank's independence, saying it was not subject to political interference or any sort of "tutelage" and would use interest rates as it saw fit. He vowed to stick to a pledge to bring inflation down to 5 percent by the end of 2015.
Prime Minister Tayyip Erdogan, determined to maintain growth ahead of presidential elections in August and parliamentary polls next year, has been a frequent critic of central bank policy and has repeatedly called for lower interest rates.
Asked how soon an interest rate cut could come, Basci said it could be on the agenda at the monetary policy committee meeting on June 24.
"If everyone is convinced that inflation is falling, if we are convinced that the inflation outlook has improved, we will evaluate it ... but we don't have to do it. We will make a decision that takes into account all risks, all factors, all possible shocks, risk premiums," he said.
He also said the bank was monitoring events in Iraq - Turkey's second-biggest export market. An offensive by Sunni fighters threatens to dismember Iraq and leave Turkey with a widening Islamist insurgency along its southern borders.
The lira briefly firmed after his remarks, but was trading back at 2.1405 to the dollar by 0953 GMT, around its weakest since late April.
Bond yields eased as Basci spoke, with the 10-year benchmark yield falling to 9.19 percent from 9.31 percent earlier in the day, but still above Friday's close.
The main Istanbul share index was down 1.12 percent at 77,888 points, recovering from a session low of 77,660.47 but underperforming the broader MSCI index of emerging markets , which was down 0.21 percent.
MORE BALANCED GROWTH
Basci defended the bank's use of interest rates as one of its main policy tools after repeated criticism from Erdogan and some of his cabinet ministers of high borrowing costs.
"We are human, and we are also citizens of this country. We also don't want high interest rates, but this is a policy tool for us," Basci said.
"It is one of the tools, and if one tool was missing, you could not do what's necessary. We have showed to everyone that we can use this tool when needed."
Basci said the economy was growing at around 4 percent, in line with the government's targets, and that inflation would start falling from June. He said the current account deficit would narrow towards 5 percent of economic output this year as growth becomes more balanced, with net exports set to have had a positive impact in the second quarter.
But he warned that Turkey's high loan-to-deposit ratio of around 135 percent could trigger forex and interest rate volatility if it continues at this level. (Additional reporting by Seda Sezer, Humeyra Pamuk and Dasha Afansieva in Istanbul; Writing by Nick Tattersall; Editing by Hugh Lawson)
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