Turkey's inflation-fighting quest risks stumbling again?

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Central bank expected to lift year-end forecast from 13-19%

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Bank could slow or even pause rate cuts in months ahead

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Near 5% monthly inflation in January higher than expected

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Uneven monetary easing cycle began in late 2024

By Nevzat Devranoglu and Jonathan Spicer

ANKARA, Feb 9 (Reuters) - Turkey's central bank is expected to revise upwards its 2026 inflation forecasts this week and possibly slow or even halt rate cuts in coming months, which analysts say ?would be another hitch in its easing cycle after prices soared again in January. Some state officials and analysts say the central bank can either slow the interest rate cuts ?that began more than a year ago or accept a slower rate of disinflation.

Most expect a bit of both - ?setting the stage for what could be the latest setback in a more than 2-1/2 ?year effort to cool inflation and ?repair years of policy missteps that sparked a lingering cost-of-living crisis. Vice President Cevdet Yilmaz said on Saturday that Turkey's tight and disciplined monetary and fiscal policies were ?vital but "not enough", adding that supply-side policies could also help to tame annual ?inflation that had risen as high as 75% before sliding to around 30% last month.

LIFTING FORECASTS AND POSSIBLY THE TARGET The first test comes on Thursday with the release of the central bank's quarterly ?inflation report, when analysts expect Governor Fatih Karahan to lift its ?year-end annual forecast ?from a range of 13-19% to possibly as high as 23%, the median estimate in a Reuters poll on January 28.

Karahan could even nudge the bank's interim end-2026 target up from 16% - though that move is less ?certain, given the target is meant to remain largely fixed in order to guide policy expectations, the analysts say.

Last month, consumer price inflation surged nearly 5% month-on-month, which was higher than expected and driven by food, beverages and new-year price adjustments.

Though it is expected to dip to 3% this month, the high monthly readings threaten to derail the yearly forecasts - pushing further onto the horizon past pledges by President Tayyip Erdogan and other officials that "single-digit" annual inflation was coming soon.

"These figures once again highlight the difficulty ?of executing disinflation ?in Turkey, given the accumulated cost of past policy choices," said Hilmi Yavas, an Istanbul-based independent economic strategist.

"To stay in touch with reality the central bank ought to revise the forecasts."

BANK COULD FURTHER SLOW RATE CUTS, OR ?EVEN PAUSE

Monetary policy easing has zig-zagged since the central bank first cut its key interest rate from 50% in late 2024. Nearly a year ago it briefly reversed course due to political turmoil, and has since slashed rates by 300 basis points, then 250, 100, 150, and again by 100 points to 37% last month.

Having already slowed its easing, the central bank warned last month about risks to the disinflation process and said it would tighten policy if there were a "significant deviation in inflation outlook from the interim targets". Some analysts predict the central bank ?may need to pause the cuts, possibly as soon as its next rate decision in March, in order to avoid this deviation.

Wall Street bank JPMorgan raised its year-end CPI forecast to 24% from 23% and predicted a series of 100-point cuts this year, with the chance of a smaller easing in March due ?to restaurant and food price pressure during the Muslim holy month of Ramadan. (Reporting by Nevzat Devrano?lu and Jonathan Spicer; Editing by Emelia Sithole-Matarise)