UPDATE 2-Turkish lira rallies after central bank hikes interest rates

(Adds CDS, updates numbers)

ISTANBUL, June 7 (Reuters) - The Turkish lira rallied about 2 percent against the dollar on Thursday after the central bank hiked its benchmark interest rate by a more-than-expected 125 basis points.

The lira traded at 4.4770 against the dollar by 1345 GMT, firming from Wednesday’s close at 4.5560. It has dropped about 15 percent this year but has recovered from a record low of 4.9290 hit on May 23.

The central bank’s rate hike to 17.75 percent followed May’s 3 percentage point tightening after inflation spiked.

The cost of insuring exposure to Turkey’s sovereign debt also fell. Five-year credit default swaps narrowed by 10 basis points (bps) from Wednesday’s close to 268 bps – their lowest level in a week and the steepest daily decline in a fortnight, data from IHS Markit showed.

Worries about President Tayyip Erdogan’s influence over monetary policy after the June 24 presidential and parliamentary elections have driven losses in the lira.

In a Reuters poll, eleven out of 16 economists predicted the bank would hike its one-week repo rate - the benchmark adopted by the central bank in May - with five each forecasting increases of 50 and 100 bps.

One economist predicted an increase of 75 bps and a further five forecasted no change.

The compound yield on the benchmark 10-year bond fell to 15.01 percent from 15.22 percent.

The main BIST 100 share index rose 1.4 percent to 98,000 points. (Reporting by Ezgi Erkoyun and Karin Strohecker Editing by Daren Butler and Louise Ireland)