UPDATE 1-Moody's sees continued uncertainty in Turkey, lira weakens

Fri Aug 15, 2014 6:33am EDT

(Adds market reaction and details)

ISTANBUL Aug 15 (Reuters) - Turkey's lira eased on Friday as political uncertainty in the aftermath of Tayyip Erdogan's presidential election victory persisted, with Moody's warning the outlook was likely to remain unstable until at least the middle of next year.

Erdogan's victory in Sunday's vote did not resolve the country's credit challenges, Moody's said, and the political landscape would remain uncertain until at least the conclusion of parliamentary elections, due by June 2015.

Turkish markets initially took Erdogan's win as a sign of continuity, firming early on Monday, but have since traded less optimistically. The lira weakened to 2.1620 to the dollar by 0955 GMT from 2.1514 late on Thursday.

"Until the political landscape reaches some stability, the country's structural reform agenda is likely to suffer, leaving Turkey exposed to potential shifts in international market sentiment," Alpona Banerji, vice president and senior analyst at Moody's, said in a note.

The ratings agency said the credit implications of the election would not be clear until a new prime minister is appointed in late August and a parliamentary election held.

Erdogan expects to announce his new prime minister as early as next week following a meeting of his ruling AK Party's senior leadership, he told reporters late on Thursday.

Erdogan, who remains prime minister until he is inaugurated on Aug. 28, wants a staunch loyalist as his replacement who can hold the AK Party together and win a stronger parliamentary majority in the election.

That would boost his chances of pushing through the constitutional change needed to introduce the presidential system he has long coveted for Turkey.

Moody's also forecast Turkey's economy would grow by 3 percent this year, down from 4 percent in 2013, and raised concern about the independence of monetary policy.

"A series of rate cuts to the one-week repo rate between January and July and one cut to the overnight borrowing rate increase inflation risks in Turkey and are likely to fuel questions about the central bank's independence," it said.

Erdogan, wedded to the idea that high interest rates cause inflation, has repeatedly called for the central bank to make sharper interest rate cuts.

Istanbul's main share index was up 0.05 percent at 77,610.12 points, slightly underperforming the broader emerging markets index, which was up 0.14 percent.

The benchmark two-year government bond yield fell to 9.22 percent from 9.24 percent on Thursday.

(Reporting by Ece Toksabay; Editing by Nick Tattersall and Alison Williams)

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