(Adds details, analyst comment)
By David Dolan
ISTANBUL, April 3 (Reuters) - Turkey's annual inflation hit its highest in 8-1/2 years in March as chronic weakness in the lira currency stoked a surge in consumer prices that could be unwelcome news for President Tayyip Erdogan ahead of a referendum to extend his powers.
Inflation jumped 11.29 percent last month from a year earlier with prices for food, transportation and alcohol all booking double-digit increases, data showed on Monday.
Hit by political concerns and worries about the direction of monetary policy, with the central bank apparently reluctant to raise its benchmark interest rate to defend the currency, the lira has lost 3 percent of its value against the dollar this year, on top of a 17 percent dive last year.
Erdogan has declared himself an "enemy" of interest rates, and repeatedly railed against what he says is the high cost of credit in Turkey. Some investors are concerned that the central bank's increasing reliance upon unorthodox methods to tighten policy shows it is wary of raising borrowing costs.
"Today's figures on their own are probably not enough to prompt another interest rate hike," William Jackson and Liam Carson of Capital Economics said in a note to clients.
"The recent rise in the lira, last month's rate hike and renewed pressure from the government to reverse the tightening cycle make this unlikely. Nonetheless, there is no scope to loosen policy."
The Turkish central bank last month hiked the cost of funds from its "late liquidity window" by 75 basis points while leaving conventional policy rates on hold.
The inflation data may not be good news for Erdogan, who is counting on broad support in an April 16 referendum that would change the constitution to give him sweeping executive powers.
Consumer prices rose 1.02 percent from the previous month in March, the data showed, outstripping the 0.6 percent increase predicted by a Reuters poll. Annual inflation was at its highest since October 2008.
Erdogan adviser Bulent Gedikli said on Twitter that the upswing in inflation was temporary, and the impact of government measures would be seen from the second quarter onwards. He did not elaborate.
"It is possible to say that the inflation data is driven by the impact of foreign exchange rate, is temporary and that we will see the reflections of the measures taken from second quarter onwards," he said after the data was released.
Producer prices rose 16.09 percent year-on-year, and 1.04 percent month-on-month, the data also showed.
The lira weakened slightly after the data and was at 3.6420 at 0809 GMT, from Friday's close of 3.6350. (Additional reporting by Nevzat Devranoglu; Editing by Humeyra Pamuk and Catherine Evans)