By Daren Butler
ISTANBUL (Reuters) - Turkey's central bank cut its overnight lending rate by 25 basis points on Thursday, setting aside concerns about inflation and possible ratings downgrades after repeated calls from President Tayyip Erdogan for cheaper credit.
Erdogan has led a campaign for cheaper credit in the hope of boosting prospects for stronger, consumption-led growth. The economy grew a smaller-than-expected 3.1 percent in the second quarter, data showed this month.
The bank left its benchmark one-week repo rate unchanged at 7.5 percent, but reduced the highest of the multiple interest rates it uses to set policy to 8.25 percent.
It is on a push to "simplify" interest rates and move towards one single rate to set policy, a process that so far has lead it to repeatedly cut rates.
"Today's rate statement includes no signs hinting that simplification is finalised, which guides us to expect more of the same from CBRT going forward," said Gokce Celik, Chief Economist at Finansbank.
"Despite the inflation outlook, we think CBRT might test the water for at least another cut in October, in order to curb the deceleration in growth."
All 18 economists in a Reuters survey had expected a cut in the overnight lending rate, the seventh in a row, with 17 forecasting a 25 basis point reduction and one predicting a 50 basis point cut.
"With the help from falling food prices, headline inflation is expected to display a decline in the short term," the central bank said in a statement.
"Yet, the recent tax adjustment in fuel prices and other cost factors limit the improvement in inflation and thus necessitate the maintenance of a cautious monetary policy stance."
An attempted coup on July 15 has fueled uncertainty on the economic outlook and sparked some concern about looming ratings downgrades. Ratings agency Moody's said on Wednesday the shock had largely dissipated. It expects to conclude its rating review of Turkey within the next month.
Moody's put the country's credit rating on review for a possible downgrade to junk status on July 18, days after the coup attempt, but calm returned to financial markets with the lira <TRYTOM=D3> recovering after falling to record lows.
"But Turkey's challenges remain longer-term," Moody's managing director of global sovereign risk Alastair Wilson told Reuters, pointing to its policymaking drives and its economic sensitivity to external factors such as global interest rate shifts and capital flows.
Turkey has reformed its food committee which monitors price rises and would work to prevent an "unfair rise" in food inflation, Prime Minister Binali Yildirim said on Wednesday, announcing a number of measures aimed at easing the strain on consumers.
Deputy Prime Minister Mehmet Simsek said on Thursday the government may cut its target of 4.5 percent growth this year while raising its forecast for the current account deficit, citing the impact of the failed coup and security issues.
Credit rating agency Fitch lowered its outlook on Turkey to negative from stable last month, while Moody's said on July 18 it was putting its rating on review for a possible downgrade to junk status.
(Additional reporting by Ece Toksabay; Editing by David Dolan and Catherine Evans)