UPDATE 2-Turkey's room to cut rates is dwindling, central banker says

Turkey's Central Bank has used a significant part of its leeway for loosening monetary policy, Governor Murat Uysal said on Thursday, after the bank cut its key interest rate by 1,000 basis points in the past four months.

Uysal also said the bank had lowered its mid-point inflation forecast for the end of 2019 to 12% in its latest quarterly inflation report, down from 13.9% in the previous report. Analysts had predicted a reduction to 12% or lower. A currency crisis last year tipped Turkey's economy into recession and sent inflation soaring above 25%, prompting aggressive monetary tightening. Inflation eased too as low as 9.26% in September.

"I want to stress that ... at the point, we have reached, we have used a significant portion of the space in the loosening direction," Uysal told reporters at a news conference to present the bank's quarterly inflation report. A moderate recovery in economic activity continues, but investment demand remains weak and a weakening global demand outlook is tempering external demand, the governor said.

The bank slashed its policy rate to 14% last week, taking advantage of slower inflation and a steadier lira after Washington canceled sanctions over Ankara's Syrian military offensive. The repo rate stood at 24% before its July cut. "There is a notable improvement in the main inflation trend. That is the fundamental factor in our decision," Uysal said. "The expansionary global monetary policies support us."

He also said that Turkey's financial system was prepared for all risks, a day after Washington said it had a list of possible Turkish sanctions targets but did not expect to use them. {nL2N27F15E] INFLATION OUTLOOK IMPROVING

Uysal said the latest rate cut was due not only to base effects but also to improvements in inflation expectations and pricing behaviour. He said the bank's future policy steps would depend on further developments in inflation. Annual inflation dropped to 9.26% in September, reaching single figures for the first time in more than two years, as it fell from 15.01% in August because of those base effects.

The lira, which slid nearly 30% against the dollar last year, was unmoved by the central bank comments. It stood at 5.7140 at 0900 GMT, weakening from a close of 5.6970 on Wednesday. The improvement in Turkey's inflation outlook is continuing, with base effects, tight monetary policy and domestic demand also contributing to a fall in inflation, Uysal said.

Consumer price inflation is expected to remain in single digits in October and rise in the last two months of 2019, he said. The central bank kept its forecast for end-2020 inflation unchanged at 8.2%, with inflation seen at 5.4% at end-2021 and 5% in the medium term, Uysal said. He said he did not want to mention a specific level for real interest rates, and that eight banks are within credit growth limits set for lower required reserve ratios.

Separately, Uysal said the central bank had recently used swaps more often than usual to fund the country's state banks, which he said have been more active in markets conducting two-way transactions. Since Turkey began an assault on northeastern Syria three weeks ago, traders have said that state banks have sold dollars at certain times to cushion lira depreciation.

The governor said he did not see additional measures on swaps, but such measures can be taken if needed.

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