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UPDATE 2-Turkish inflation falls more than expected, paving way for rate cut

Ece Toksabay

* Annual inflation rate eases to 15.01%

* Is Invest economist expects cbank to cut rates in Sept

* Would follow 425 bps rate cut by central bank in July

* Lira strengthens after inflation data (Adds analyst comment, dollar bonds, criticism of data)

ANKARA, Sept 3 (Reuters) - Turkey's annual inflation rate fell slightly more than expected to 15.01% in August, data showed on Tuesday, resuming its downward trend and likely paving the way for another interest rate cut as soon as next week.

The data was another positive surprise after figures on Monday showed Turkey's economy shrank less than expected in the last quarter.

Apart from a brief rise in July, annual inflation has been generally falling since hitting a 15-year high above 25% last October, just after the worst of Turkey's currency crisis which tipped the economy into recession.

Consumer price inflation eased in August from 16.65% in July to hit its lowest year-over-year reading since May last year. It was below a Reuters poll forecast of 15.51.

Month-on-month, consumer inflation stood at 0.86% in August, also less than a poll forecast of 1.3%, data from the Turkish Statistical Institute (TUIK) also showed.

The Turkish lira traded at 5.8020 against the U.S. dollar at 0720 GMT, strengthening from 5.8170 before the data.

The recent easing of inflation allowed the central bank to cut interest rates in July for the first time in more than four years, and by a hefty 425 basis points. Analysts said the positive surprises in August would lead to more monetary easing.

"The expected continuation of the decline in inflation in the coming months gives the central bank room for future rate cuts," said Muammer Komurcuoglu, economist at Is Invest.

"Unless there is an upward surprise on the exchange rate before the (policy) meeting, we expect a 250 basis points cut in the policy rate at the September meeting," he said. The central bank will hold its next policy meeting on Sept. 12.

The bank slashed its key rate to 19.75% in July, leaving Turkey with a still relatively high real interest rate, and has tied further cuts to further easing in inflation.

Central bank Governor Murat Uysal has said there is "considerable" room for maneuver on policy as the bank forecasts 13.9% inflation by the end of the year, and 8.2% at the end of 2020.

Turkey's dollar bonds rose after the inflation data, with longer-dated maturities logging the most gains, including the 2045 issue rising 1.3 cents.

President Tayyip Erdogan has long called for rate cuts to spur economic growth.

The steady recent decline in annual inflation is primarily due to the so-called base effect of measuring it against the jump that began around mid-2018. CPI inflation spiked in September and October of last year, suggesting the next two monthly readings will fall sharply from 15% in August.

Aside from base effects, in August the biggest fall was in transport prices, which dropped 1.94%, while food and beverage prices fell 0.77%, the data showed.

The producer price index fell 0.59% month-on-month in August for an annual rise of 13.45%, the official data showed.

( Additional reporting by Behiye Selin Taner; Editing by Jonathan Spicer and Susan Fenton)

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