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UPDATE 2-Turkish inflation rises on food, tax shocks

* Rise broadly in line with forecasts

* Underlying trend seen downward

* Annual inflation remains above cbank target

(Adds quotes, details, background)

By Ozge Ozbilgin

ANKARA, Oct 3 (Reuters) - Food prices drove Turkish inflation higher in line with forecasts in September, a supply side shock to prices that the central bank has so far put aside in easing monetary policy.

Tax and energy price hikes are also set to push inflation higher in the short term in Turkey but the underlying longer-term trend is for less pressure on prices, with core inflation indicators falling last month.

The consumer price index rose 1.03 percent month-on-month in September, compared with a Reuters poll forecast of a 1.10 percent rise, for a year-on-year increase of 9.19 percent, the Turkish Statistics Institute said.

"Today's data will not cause a change in central bank policy," said Bora Tamer Yilmaz, a vice president at Halk Invest, forecasting the bank will bring the higher of the two rates it uses to control policy down by at least 100 basis points this month and its lower main policy rate by 25 basis points in December.

Central banks aim to manage inflation by regulating the amount of demand in the economy and can only watch when factors like drought, poor harvests or rising global fuel costs raise the price of staple commodities. Policymakers often swallow the higher headline inflation which results, judging it a short-term shock that fades quickly, although they do keep a close eye on the impact on broader price growth in the economy.

The central bank cut its higher overnight lending rate - now at 10 percent - for the first time in seven months on Sept 18 and hinted it could do more to try to cushion a growth slowdown.

Turkey's economy was the fastest-growing in Europe last year, expanding by 8.5 percent, but growth has slowed this year as domestic demand has weakened.

Yilmaz said monthly inflation was driven higher by food prices, which rose 2.14 percent on the month. There were also strong rises in transport costs which climbed 1.65 percent while communication prices were up 1.54 percent.

Annual inflation remains well above the central bank's year-end target of 5 percent and year-end forecast of 6.2 percent and the bank told economists on Tuesday that recent tax hikes would lead it to revise up its year-end forecast.

Bankers who attended the meeting said they were told tax increases - Turkey raised taxes on car sales, fuel and alcohol last month - would add 0.5 basis points to the year-end forecast, although the bank said other energy price hikes were already factored in.

Turkey raised gas and electricity prices by some 10 percent at the start of this month.

CORE INFLATION FALLS

The tax hikes and price increases in natural gas and electricity, designed to quash a recently widening budget deficit, will weigh on end-year inflation expectations, said ING Bank's research group vice president Muhammet Mercan.

"However...inflation will significantly drop in the fourth quarter and maintain a positive outlook, so current CBT policy (although with a more cautious stance) might remain intact as long as external liquidity remains in place," he said.

The central bank cut its lending rate, the upper boundary of its interest rate corridor, by 150 basis points to 10 percent, last month. It kept its main policy rate, the one-week repo rate, at 5.75 percent and borrowing rate at 5 percent.

"As long as there is no worsening in core inflation, the central bank will not alter (the direction of) its monetary policy," Yilmaz said.

Among the core consumer price indicators, the "H" measure dipped to 7.21 percent from 7.71 percent a month earlier and the "I" measure to 6.68 percent from 7.17 percent.

The former excludes unprocessed food products, energy, alcoholic beverages, tobacco products and gold, while the latter strips out food, energy, beverages, tobacco products and gold.

After the data, the lira stood unchanged at 1.7950 against the dollar , while the benchmark bond yield

dipped to 7.53 percent from 7.54 percent.

The producer price index also rose 1.03 percent on the month, compared with a forecast rise of 0.62 percent, for an annual rise of 4.03 percent.

The central bank adopted a complicated monetary policy mix in late 2010 to help it battle inflation and rein in Turkey's gaping current account deficit. After lengthy doubts about the effectiveness of the bank's policies, markets and analysts now view the strategy and its results favourably.

(Reporting by Ozge Ozbilgin and Seltem Iyigun; Writing by Daren Butler; Editing by Nick Tattersalln and Patrick Graham)

((daren.butler@thomsonreuters.com)(+90-212-350 7122)(Reuters Messaging: daren.butler.thomsonreuters.com@reuters.net))

Keywords: TURKEY INFLATION/