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UPDATE 1-Turkish lira eases as industrial output falls

Tuesday, 9 Oct 2012 | 6:14 AM ET

* Lira slightly eases after industrial production

* Bonds yields inch down, shares flat

* Aug industrial output falls 1.5 pct y/y; below f'cast

* Markets unmoved by medium-term programme

(Adds quotes, details) By Seltem Iyigun

ISTANBUL, Oct 9 (Reuters) - The Turkish lira eased slightly and bond yields inched down on Tuesday as a surprise fall in August industrial output and a cut in official growth forecasts suggested the central bank will keep monetary policy loose for longer.

Turkish industrial production fell 1.5 percent year-on-year in August, data from the Turkish Statistics Institute showed on Tuesday, confounding a Reuters poll forecast for a rise of 2.5 percent.

Turkey's government also revised down its growth forecasts for this year and next but stuck to its prediction that the economy would expand by 5 percent in 2014.

By 0935 GMT, the lira had weakened to 1.8145 against the dollar , from 1.8115 late on Monday. Against its euro-dollar basket , the lira was flat at 2.0808.

"The low industrial production data affected the lira negatively," said Erkin Isik, strategist at TEB. "The slowdown in growth supported expectations that the central bank would keep its rates low for a long time."

The central bank cut the higher of the two interest rates it uses to control policy by 150 basis points to 10 percent in September, the first cut in seven months, and hinted it could do more to support a slowing economy.

On Monday, the lira eased to 1.8168 against the dollar, its weakest since due Sept. 6, due to heightened tensions with Syria and a sell-off in emerging markets due to growth worries.

Geopolitical tensions between Syria and Turkey have risen since five Turkish civilians were killed in artillery shelling from Syria last week. Tuesday was the sixth consecutive day of retaliatory strikes by Turkey on Syria.

The yield on Turkey's two-year benchmark bond

stood at 7.63 percent, slightly down from Monday's close at 7.68 percent.

Announcing the government's medium-term programme for 2012-2015 on Tuesday, Deputy Prime Minister Ali Babacan said the economy was expected to grow 3.2 percent this year, below its forecast of 4 percent made a year ago.

The government also cut the forecast for next year's growth to 4 percent from 5 percent but said the current account deficit, a key weakness of the economy, would gradually decline.

Markets did not immediately react to the revision.

The International Monetary Fund said on Monday that Turkey is on track to return to its long-term growth path after a soft landing this year but warned that its wide current account deficit leaves it vulnerable to volatile foreign capital flows.

Turkey's main share index was up 0.01 percent 67,442 points, in line with a 0.12 percent rise in the emerging markets index .

(Writing by Seltem Iyigun; Editing by Catherine Evans)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 70 62)(Reuters Messaging: seltem.iyigun.thomsonreuters.com@reuters.net))

Keywords: MARKETS TURKEY/