October 31, 2018 / 8:26 AM / 19 days ago

UPDATE 2-Turkey central bank sharply raises inflation forecasts

* 2018 inflation forecast raised to 23.5 pct vs 13.4 pct

* 2019 forecast raised to 15.2 pct from 9.3 pct

* Steep hikes reflect deep impact of lira selloff

* Bank Governor says monetary policy to stay tight

* But September inflation was higher than interest rates (Adds comments from Cetinkaya, graphic)

By Ece Toksabay and Ezgi Erkoyun

ISTANBUL, Oct 31 (Reuters) - Turkey’s central bank on Wednesday sharply raised its inflation forecasts for this year and next, predicting a rate of 23.5 percent by the end of 2018 and acknowledging the deep impact of a lira selloff that has shaken confidence in the economy.

The Turkish currency has fallen by nearly a third against the dollar this year, driving up the cost of food and fuel and deepening investor concern about the eventual fallout for the real economy and the banking sector.

The central bank, which has come under pressure from President Tayyip Erdogan to lower borrowing costs, this month kept interest rates on hold at 24 percent, just a touch above its revised end-2018 inflation forecast.

That move was expected after a mammoth hike in September that has helped the lira recoup some losses.

The bank, which previously expected 2018 inflation of 13.4 percent, also raised the forecast for the end of 2019 to 15.2 percent from 9.3 percent, governor Murat Cetinkaya said on Wednesday.

“Under the assumption of a tight monetary policy stance and enhanced policy coordination focused on bringing inflation down, inflation is projected to converge gradually to the target,” Cetinkaya said at a presentation of the bank’s quarterly inflation report.

He was asked twice if inflation had already peaked or would rise further in October. He declined to answer, saying he instead wanted to focus on medium- and long-term outlooks.

The central bank has long held an inflation target of 5 percent, and Cetinkaya said it would continue to use all available instruments to steer inflation lower and further monetary tightening would be delivered if needed.

But with inflation at 24.52 percent last month, economists say the central bank has effectively left Turkey with real interest rates - the level once price rises are taken into account - in negative territory.

The bank also raised its 2020 year-end inflation forecast to 9.5 percent from 6.7 percent in its previous inflation report.

The lira was down at 5.5070 against the dollar at 0944 GMT, having hit its firmest in nearly three months on Tuesday.

Writing by David Dolan; Editing by Daren Butler and John Stonestreet

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