* Political stability expectations boost currency
* Concern over economic policy outlook tempers optimism
* Lira has weakened 17 percent this year (Adds shares and bonds)
By Ezgi Erkoyun and Daren Butler
ISTANBUL, June 25 (Reuters) - Turkish markets rallied on Monday as investors bet on Tayyip Erdogan’s presidential election victory bringing political stability, setting aside any concerns over the direction of economic and monetary policy.
Erdogan emerged triumphant overnight from his biggest electoral challenge in 15 years, giving him the sweeping executive powers he has long sought and extending his grip on the nation of 81 million until at least 2023.
The lira strengthened 1.5 percent to 4.5920 against the dollar by 0731 GMT from Friday’s close of 4.6625. It had firmed as far as 4.5375 in early trade.
“In the short term, markets may be relieved that a period of political instability has been avoided,” said Jason Tuvey, senior emerging markets economist at Capital Economics.
“But any rally could quickly go into reverse if President Erdogan uses his strengthened position to pursue looser fiscal and monetary policy, as we fear is likely.”
He promised before the election to exert a tighter grip on monetary policy.
The main BIST 100 stock index jumped 2.2 percent to 97,964 points, having opened more than 3.5 percent higher. The 10-year benchmark bond yield fell to 16.07 percent from Friday’s 16.29 percent, while the two-year yield fell to 18.84 percent from 19.18 percent.
Turkey’s dollar-denominated bonds maturing 2022 and beyond gained, with the 2040 issue chalking up its biggest daily gains since 2013.
Erdogan took 52.5 percent of the vote in the presidential race, with more than 99 percent of votes counted. His AK Party took 42.5 percent in the parliamentary election and its nationalist allies beat expectations with 11.1 percent, giving their alliance a legislative majority.
Investors welcomed the prospect of a stable working relationship between the president and the new parliament, although concerns remained over Erdogan’s policy promise.
The lira has lost 17 percent against the dollar this year, mainly due to worries about the central bank’s independence in the face of increased influence from Erdogan, who wants lower interest rates to boost economic growth.
“The president has promised to force down interest rates. These comments suggest that the central bank’s monetary policy independence remains at risk. Additionally, fiscal pressures may continue ahead of March 2019 local elections,” said Phoenix Kalen, a strategist at Societe Generale in a note to clients.
Turkey’s central bank has delivered 500 basis points of tightening since late April as it seeks to put a floor under the lira in the face of double-digit inflation. (Additional reporting by David Dolan; Writing by Ezgi Erkoyun; Editing by David Dolan and John Stonestreet)