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UPDATE 4-Surprise jump to 17.5% lifts Turkish inflation to 2-year high

* Post-lockdown rise in demand fuels inflation

* Weak lira, loss of monetary credibility also factors

* Forecasts raised, rate cut expectations diminish (Adds Erdogan comments)

ISTANBUL, July 5 (Reuters) - Turkish annual inflation hit a two-year high of 17.53% in June, exceeding a 17% forecast after a brief dip, prompting President Tayyip Erdogan to say structural issues needed to be tackled.

The month-on-month consumer price reading was also higher than expected, up 1.94% according to the Turkish Statistical Institute, compared with a Reuters poll forecast of 1.50%.

Erdogan said Turkey’s central bank was determined to solve high inflation and that structural issues causing high consumer prices needed to be addressed.

In double digits for most of the last four years, inflation has been held up by the Turkish lira’s depreciation, depleted monetary credibility and a burst of demand as the economy emerges from the coronavirus pandemic.

“The battle with high inflation requires a team effort. Our central bank has a determined approach towards this issue,” he said after a cabinet meeting, adding that the government was also taking necessary steps to boost the ailing lira.

Food inflation - a strain on households hit hard by pandemic income losses - was up 20% from last year.

The latest data led Goldman Sachs to raise its year-end annual inflation forecast to 16% from 15.5% earlier, while Barclays lifted its forecast to 14.8% from 13.8%.

The central bank “will only be able to lower rates slightly” in the fourth quarter, Goldman said in a client note. Citigroup said it no longer predicted an interest rate cut this year.

Lira depreciation accelerated when Erdogan sacked a hawkish central bank governor in March, raising worries of earlier-than-expected cuts to the 19% policy interest rate.

Analysts said the hot inflation data eased those worries.

The lira firmed to 8.6650 against the dollar by 1244 GMT from Friday’s close of 8.7.

“It very much looks like the central bank’s promise to keep real rates positive will be tested with the headline rate very likely to push through” the 19% policy rate, Tim Ash of BlueBay Asset Management said.

In May, inflation unexpectedly dropped to 16.59% when price hikes were delayed due to a COVID-19 lockdown. It has otherwise been on an uptrend since September, despite the start of a monetary tightening cycle that month.

CENTRAL BANK TEST

The producer price index rose 4.01% month-on-month in June for an annual rise of 42.89%. That reflects the currency’s drop of about 17% since mid-March, which has raised overall prices for import-dependent Turkey.

Transportation costs soared more than 26% year-over-year in June, reflecting higher energy prices, while household goods were up nearly as much, the data showed.

Central Bank Governor Sahap Kavcioglu said on Friday that inflation could be higher than expected in July and August, but that monthly moves would not affect its year-end forecast of 12.2%, two sources on an investor call said.

They cited Kavcioglu as saying the bank expected inflation to show a marked fall at the start of the fourth quarter at the latest.

The inflation data make the bank’s year-end forecast “appear very optimistic,” BlueBay’s Ash said.

Concerns about political interference in central bank independence have risen after Erdogan, a self-described “enemy” of interest rates, sacked the last three governors in two years.

Additional reporting by Can Sezer, Ece Toksabay, Tuvan Gumrukcu, Berna Suleymanoglu and Halilcan Soran; Editing by Jonathan Spicer, Hugh Lawson and Alexander Smith

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