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ISTANBUL, June 3 (Reuters) - Turkish inflation eased to a lower-than-expected 18.71% in May, official data showed on Monday, causing the lira to decline as investors worried that the central bank may lower its policy rate earlier than expected.
In the wake of last year's currency crisis, which erased nearly 30% of the lira's value against the dollar, overall inflation peaked at a 15-year high above 25% in October, before gradually slipping to 19.50% in April.
Economists surveyed by Reuters had expected inflation to be at 19.10% in May.
Month-on-month, inflation stood at 0.95% in May, lower than the poll forecast of 1.3%. The producer price index rose 2.67% month-on-month for an annual rise of 28.71%, the data from Turkish Statistical Institute showed.
Inflation in May was pushed lower by falls in prices for household goods, which declined 1.58%, and food and non-alcoholic drink, which dropped 1.18%, the institute said.
The largest rise was in alcoholic drink and tobacco prices, which rose 8.88%, it said. Clothing and shoe prices rose 4.09%. The median estimate in the Reuters poll showed inflation is expected to stand at 16.0% at the end of 2019, slightly above the government's estimate of 15.9%.
Finance Minister Berat Albayrak, who is Erdogan's son-in-law, said that the declining trend in inflation continues and added that Turkey will hopefully achieve its year-end targets.
The lira declined to as much as 5.8925 against the dollar following the inflation data, from around 5.8550 before. It stood at 5.8700 at 1039 GMT, some 0.4% weaker from Friday's close.
The market took the inflation data as a sign that the central bank could cut rates earlier than expected, said Piotr Matys, emerging markets forex strategist at Rabobank.
"You would expect local assets to benefit from it, but to me this rise (in the dollar) highlights growing concerns that a rate cut is coming earlier than expected," he said. "It is essential for the central bank to maintain tight policy."
A cautious message in the central bank's next monthly price developments report would support the currency, Matys said. The bank is expected to release the report on Friday, after a three-day religious holiday. Its next rate-setting meeting is on June 12.
Concerns over the central bank's ability to counter rising inflation in the face of calls from President Tayyip Erdogan to lower interest rates sparked last year's selloff.
The central bank raised its policy rate to 24% in September to counter rising inflation and support the lira, bringing the total increase last year to 11.25 percentage points.
The high borrowing costs combined with surging import prices hit economic activity, driving the economy into recession. Year-on-year, the economy contracted 3% in the fourth quarter of 2018 and 2.6% in the first quarter of 2019.
The bank has little room for a policy change given several factors that cause uncertainty, said Jason Tuvey, senior emerging markets economist at Capital Economics.
He cited the re-run of the Istanbul mayoral election on June 23 and concerns about relations with Washington over Ankara's push to purchase Russian missile systems as the factors.
"Generally, investors are concerned that the central bank might use this (inflation data) as a precursor to cut interest rates. There will be some political pressure on the central bank to cut rates ahead of the election," he said.
Investors expect the central bank to start cutting rates around July, according to a Reuters poll in April which also had a median forecast of 21.50% for the central bank's policy rate at year-end.
The bank has said it would keep monetary policy tight until inflation shows convincing improvement.
(Reporting by Ali Kucukgocmen; additional reporting by Tuvan GumrukcuEditing by Dominic Evans, Toby Chopra, William Maclean)