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UPDATE 2-Turkish lira notches weekly gains of 12% on cenbank's new look

(Adds industrial production data, analyst comment)

ISTANBUL, Nov 13 (Reuters) - Turkey’s lira firmed on Friday to its strongest level in seven weeks, notching a weekly gain of some 12%, after President Tayyip Erdogan’s pledge to adopt a new economic model raised expectations of a sharp rate hike from the central bank.

The lira hit 7.6150 to the dollar in morning trade, its firmest level since Sept. 25. It subsequently eased back to 7.6700 by 0825 GMT from Thursday’s close of 7.6625.

The currency’s rally this week, after touching a record low of 8.58 last Friday, was sparked by expectations of a more orthodox economic policy after the central bank governor and the finance minister left office over the weekend.

Erdogan shifted to a more market-friendly tone on Wednesday, promising economic growth based on stability and international investment -- a turnaround from blaming foreigners and high rates for Turkey’s woes.

The central bank is seen raising its policy rate next week to 15% from 10.25%, a Reuters poll showed. Erdogan’s speech was viewed as implying he would condone such a hike.

Bankers say foreign investors are leading the purchase of Turkish assets on optimism for economic policy changes.

“In a scenario where locals are also on the sell side (for dollar holdings), we see a high probability for a tendency to a trend between 7.53-7.73” in the dollar-lira exchange rate, said Orkun Godek, a strategist at Deniz Invest.

Turkish locals’ forex and gold holdings hit a record high of $224.23 billion on Nov. 6, indicating a rise of some $30 billion this year due to a lack of confidence in the lira.

The central bank raised its policy rate by 200 points in September but held steady last month, leading to a sell-off in the lira. The bank’s use of backdoor policies, funding the market above the policy rate, has brought the weighted average cost of funding to 14.46% as of Thursday.

The lira also firmed sharply against the euro this week, to as much as 8.9823 on Friday.

Turkey’s economy has been recovering after a contraction of nearly 10% year-on-year in the second quarter due to restrictions aimed at slowing the spread of the coronavirus.

Industrial production jumped 8.1% year-on-year in September, data showed on Friday.

A rate hike could stall the economy’s rebound from the coronavirus fallout but could help avert broader balance of payments problems by boosting the lira. (Reporting by Ali Kucukgocmen and Nevzat Devranoglu; Editing by Daren Butler, Sherry Jacob-Phillips, William Maclean)

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