* Central bank cuts 750 bps since mid-July
* Economists say further rate cuts to be limited
* Turkish inflation expected to fall on base effect (Adds quote, graphic, details)
By Daren Butler and Ezgi Erkoyun
ISTANBUL, Sept 12 (Reuters) - Turkey's central bank cut its policy rate by 325 basis points tmsnrt.rs/32KbNrP to 16.5% on Thursday, delivering its second aggressive policy easing in less than two months as it seeks to boost a recession-hit economy and put last year's currency crisis behind it.
The bank cited a recent decline in inflation and a global shift to easier monetary policy as it lowered its benchmark one-week repo rate from 19.75%, marking its latest step away from the emergency settings adopted last year.
“At this point the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path,” the central bank said in a statement.
The “inflation outlook continued to improve” and in August “displayed a significant fall”, it added.
The central bank statement signalled further rate cuts would be limited, Ercan Erguzel from Morgan Stanley said in a note, maintaining his year-end policy rate forecast at 15.75%.
“We read this statement as a signal that next moves in the policy rate are more likely to be measured compared to the last two big cuts,” Erguzel said, adding that he expects a 75 basis point cut at the central bank’s next meeting on Oct. 24.
Thursday’s move means the bank has cut its policy rate by 750 basis points since mid-July. It slashed interest rates by 425 points from 24% seven weeks ago in its first policy change since the depths of the crisis, which tipped the largest economy in the Middle East into recession.
The lira firmed to 5.6825 against the dollar after the announcement, from 5.7500 beforehand, and was up about 1% on the day on relief that the central bank did not slash rates far more than initially expected.
The Turkish currency traded at 5.6670 at 1229 GMT, after the European Central Bank (ECB) cut its deposit rate to an all-time low of -0.5% and restarted its bond-buying programme known as quantitative easing.
The lira lost some 30% of its value against the dollar last year and inflation soared to a 15-year high above 25%. Inflation has since eased to 15% and is expected to fall briefly to single digits in October thanks to the “base effect” measurement against last year’s spike.
The decline in inflation and a shift among the world’s major central banks to a more accommodative policy stance has stemmed further losses in the lira this year and paved the way for the Turkish rate cuts, which are set to continue until year-end according to economists.
According to a Reuters poll on Tuesday, economists expected the bank to lower rates by a median of 250 basis points. However before the decision, swap-market traders were expecting a cut of between 300 and 400 points.
Central bank governor Murat Uysal, appointed by Turkish President Tayyip Erdogan in early July after his predecessor did not follow policy instructions, has said policy will aim to deliver a “reasonable” real interest rate.
Erdogan is a self-described “enemy” of high interest rates and has said they, along with inflation, would fall to single digits in a short time.
On Thursday, the central bank said a “cautious” policy stance was necessary to keep the “disinflation process on track.” It added that inflation would likely slide “slightly below” its year-end forecast of 13.9%, which it made in July.
Ankara has attempted to boost lending by state banks to reinvigorate an economy that entered a recession last year and contracted in the first two quarters of this year.
Turkey’s longer-dated sovereign dollar bonds made solid gains following the decision, while the Istanbul stock exchange banking index was up 1.9% and the main BIST 100 index gained 0.6%.
Additional reporting by Ece Toksabay, Can Sezer and Behiye Selin Taner; Writing by Jonathan Spicer; Editing by Dominic Evans and Alex Richardson