UPDATE 2-Turkish current account deficit shrinks to 34-month low

(Adds details) By Seltem Iyigun

ISTANBUL, Oct 11 (Reuters) - Turkey's current account deficit fell in August to its lowest level since October 2009, central bank data showed on Thursday, due mainly to a rise in gold exports and a slowing economy.

The current account deficit fell to $1.18 billion from a revised $4.097 billion a month earlier, below a Reuters poll forecast for a deficit of $1.750 billion, data showed.

"The significant slowdown in the economy narrows the current account deficit," said Garanti Securities economist Gizem Oztok Altinsac. "It would stand at around $50-55 billion at the end-2012, which is equivalent of 6 percent of national output.

"This is positive for the lira in the medium-term and for hopes of a credit rating upgrade," Oztok said.

In the first eight months of the year the deficit, regarded as a major weak point of the Turkish economy, was $36.08 billion, 33 percent lower than in the same period of 2011.

Late in August, credit rating agency Fitch said it might lift Turkey to investment grade if it makes progress towards its potential growth rate, trims inflation to target and narrows the current account gap to a more sustainable level.

Fitch currently assigns Turkey a BB+ sovereign rating with a stable outlook, one notch below investment grade. The rating agency said on Wednesday it will review the rating quite soon.

The trade deficit, a major contributor to the current account deficit, dipped 26 percent compared with a year ago to $45.2 billion in the first eight months of 2012.

"The bulk of this improvement stems from net gold exports, as 12-month cumulative net gold exports reached $1.4 billion in August, from $-1.2 billion in July," said Emre Tekmen, an economist at TEB.

"We expect the 12-month cumulative current account deficit to continue to contract in the coming months. Nevertheless, as a result of the central bank's monetary easing, we expect domestic demand and imports to pick up gradually in Q4."

The declining trend in the current account deficit is likely to reverse its course starting from November, Tekmen added.

To narrow the current account deficit - which reached 10 percent of output in 2010 - and reduce inflation, Turkey's central bank has employed a policy mix since late 2010 based on daily liquidity injections, an adjustable interest rate corridor and a low policy rate.

The bank cut the upper end of the corridor - the gap between its overnight lending and borrowing rates - by 150 basis points to 10 percent for the first time in seven months in September, and hinted it could do more to support growth.

Turkey was Europe's fast-growing economy last year, expanding 8.5 percent, but with domestic demand falling this year despite strong exports, policymakers are trying to steer it towards a soft landing. Earlier this week, the government cut its growth forecasts for 2012 and 2013, and warned that budget deficits would be wider than previously thought.

(Editing by Catherine Evans)

((seltem.iyigun@thomsonreuters.com)(+90 212 350 7062)(Reuters Messaging: seltem.iyigun@thomsonreuters.com))