Wed Sep 10, 2014 6:40am EDT
* Growth falls short of expectations in second quarter
* Finance minister sees threat to 2014 4 pct target
* Lira at weakest since late March
* Slower growth will heighten pressure for rate cuts (Adds Finance Minister Mehmet Simsek)
By Ayla Jean Yackley and Behiye Selin Taner
ISTANBUL, Sept 10 (Reuters) - Turkey's economy grew less than expected in the second quarter, helping send the lira to its lowest in more than five months and prompting the finance minister to warn a 4-percent full-year growth target may be missed.
Mehmet Simsek said drought, which has hit agricultural output, as well as economic weakness in European export markets and wars in Ukraine and Iraq heightened the risk of growth remaining below target in 2014 as a whole.
The ruling AK Party has a strong record on the economy and can ill afford a slowdown in the run-up to a parliamentary election next June, and the figures are likely to increase political pressure on the central bank to cut interest rates.
"Turkey's growth has lost some momentum in the second quarter of 2014 due to monetary tightening, the delayed impact of the macro prudential measures, slowing EU economies and geopolitical tensions," Simsek said in an emailed statement.
Gross domestic product (GDP) grew 2.1 percent year-on-year in the second quarter, according to data published on Wednesday by Turkey's statistics institute, missing the average forecast in a Reuters poll of 2.65 percent growth.
The central bank hiked rates sharply in January to defend a tumbling lira and, although it has been trimming them since, has said policy will remain tight until inflation pressures ease.
President Tayyip Erdogan, prime minister until last month, has been a frequent critic of central bank policy, urging sharper rate cuts to spur growth.
But stormclouds are gathering.
"Turkey has seen the biggest credit-to-GDP growth in all (emerging markets) but clearly the feed-through to economic growth is extremely limited and investment growth is actually continuing to recede as a share of GDP," UBS strategist, Manik Narain, said.
"It's overall a disappointing print in headline terms and the breakdown is not healthy either. This may make the central bank hesitate to tighten policy."
The central bank unexpectedly lowered its overnight lending rate at its last meeting on Aug. 27, in a move seen as having little easing impact and more as a signal to a government that it is supporting the economy.
The bank had cut its main one-week repo rate by 175 basis points in the three months before that decision, fuelling criticism from some economists that it was caving in to political pressure despite persistently high inflation.
The lira - already under pressure from concern that the United States would hike interest rates sooner than expected - fell to 2.2109 against the dollar by 0810 GMT, its weakest since the end of March, from 2.2032 late on Tuesday.
CAUTION AGAINST RATE CUTS
Output grew 2.4 percent from the previous quarter on a calendar-adjusted basis, the data showed. The statistics institute revised its first quarter GDP growth figure to 4.7 percent year-on-year from an initial 4.3 percent.
Odeabank market strategist, Erkan Dernek, said the data put the economy on track for growth of about 3.2 percent for the year, but warned against interest rate cuts.
"As the currency depreciates, we are heading to a period that we had observed last year, in which inflation will stay relatively high and growth will slow down with tight financial conditions," he said.
"The central bank should think of keeping interest rate corridors unchanged, otherwise the currency will depreciate further, weighing on macro-fundamentals."
Inflation peaked in May, but earlier this month Deputy Prime Minister Ali Babacan conceded it may still go above the central bank's forecast of 7.6 percent for the year.
Istanbul's main share index fell 0.85 percent to 79,400 points. The benchmark 10-year government bond yield rose to 9.34 percent from Tuesday's 9.19 percent. (Additional reporting by Nevzat Devranoglu in Istanbul and Sujata Rao in London; Writing by Dasha Afanasieva; Editing by Nick Tattersall and Louise Ireland)
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