* Energy price hikes help drive inflation
* Produce price rises much lower than forecast
* Cbank expected to ease policy further this month
(Adds analysts' comments, details, background)
ANKARA, Nov 5 (Reuters) - Turkey's annual inflation rate slowed sharply to 7.8 percent in October as monthly price increases were less than expected despite energy price hikes, giving the central bank room to keep easing policy.
Ratings agency Fitch said on Monday that Turkey's economy was heading for a soft landing as it upgraded the country to investment grade status.
While annual inflation remains well above the central bank's 5 percent target, it slowed from 9.19 percent in September, according to the Turkish Statistics Institute.
Turkey raised taxes on car sales, fuel and alcohol in September and increased gas and electricity prices by some 10 percent at the start of October.
Those hikes pushed monthly consumer prices up by 1.96 percent in October, accelerating from the previous month but below forecasts in a Reuters poll of 2.1 percent.
Serkan Ozcan, assistant general manager at Odea Bank, forecast the central bank would lower its upper interest rate for a third straight month in November.
``We think the central bank will lower the upper band of the interest rate corridor by 50 basis points to 9 percent this month and at that point monitor inflation developments for some time,'' Ozcan said.
The bank has already signalled further easing to shore up an economy which was the fastest-growing in Europe last year, expanding by 8.5 percent, but has slowed sharply this year as domestic demand has weakened.
``We can see the fundamental reason for the monthly inflation rise was the increase in household prices due to the electricity and gas hikes,'' said Ozcan, adding that food price inflation had also played a role in boosting prices.
Household inflation, including fuel costs, stood at 3.31 percent in October, while transport prices rose 2.06 percent and food and non-alcoholic drinks prices were up 1.66 percent.
The inflation data had little market impact. At 0915 GMT, the lira stood at 1.7923 against the dollar, compared with 1.7928 beforehand. The benchmark bond yield stood at 7.05 percent, up from 7.02 percent on Friday.
The central bank cut its overnight lending rate in October in a bid to reinvigorate the economy, while taking steps to curb loan growth and avoid stoking inflation.
It lowered the upper boundary of the interest rate corridor it uses to control monetary conditions for the second month in a row in October to 9.5 percent from 10.0 percent.
``Considering the economic slowdown, we expect a 50 basis point cut in the upper band of the corridor at the Nov. 20 central bank meeting,'' said Garanti Securities economist Gizem Oztok Altinsac.
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Annual inflation has come down from 11.14 percent in April but remains above the central bank's year-end forecast of 7.4 percent and is set to remain high next year.
``It looks like year-end inflation will not exceed 7.4 percent,'' said EFG Istanbul chief economist Haluk Burumcekci, but added that a cigarette hike set for January could boost inflation next year.
``Next year will not be easy. If the cigarette tax hike happens in January it will add at least 1 percentage point to inflation, in which case it will be difficult to get below 7 percent,'' Burumcekci said.
The central bank's mid-point forecast for end-2013 inflation is 5.3 percent.
The producer price index (PPI) rose 0.17 percent on the month in October, compared with a forecast rise of 1.05 percent, and slowing sharply after rising 1.03 percent in September.
On an annual basis producer prices rose 2.57 percent, data showed, easing after a 4.03 percent increase in September.
``The rapid PPI fall and the moderate trend in core inflation is supporting the 'relatively' positive inflation outlook,'' said Altinsac.
Among the core consumer price indicators, the ``H'' measure dipped to 6.78 percent year-on-year from 7.21 percent a month earlier and the ``I'' measure to 6.11 percent from 6.68 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.
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.
The current account deficit shrank to a 34-month low in August, latest data showed.
(Reporting by Ozge Ozbilgin and Seltem Iyigun; Writing by Daren Butler; Editing by Susan Fenton)