By Orhan Coskun and Ercan Gurses
ANKARA (Reuters) - Turkish inflation could reach double digits in the first quarter for the first time in almost five years after the lira's falls, two senior economy officials said on Monday, potentially putting more pressure on the central bank to hike interest rates.
The lira <TRYTOM=D3> has dropped as much as 10 percent since the start of 2017, battered by concern over Turkey's political and economic outlook - and doubts about whether the authorities will take decisive steps to arrest the slide.
President Tayyip Erdogan, a vocal opponent of higher interest rates, will meet with economy officials including the central bank governor later on Monday to discuss developments including the lira, government sources said.
The central bank effectively shut off two of its lira funding taps on Monday, bankers said, in an attempt to push lenders to borrow at a higher rate and defend the currency without an outright rate hike.
The lira was trading at 3.7780 to the dollar by 1300 GMT (8 a.m. ET), off a record low of 3.9417 hit last Wednesday.
Erdogan, a populist who favors cheap credit to spur lending and bolster the economy, wants borrowing costs to be low, although he said last Thursday that the bank had the ability to take "all necessary steps" to defend the lira.
He and the government are keen to prevent the economy losing too much momentum ahead of an expected referendum in the coming months on constitutional changes that would create a full presidential system and hand him greater powers.
One of the economy officials said growth in 2016 is expected to have been just 2.5 percent.
But rising prices also risk hurting ordinary Turks.
"Inflation will be in double digits in the first quarter," the economy official told Reuters, speaking on condition of anonymity because it is not an official government forecast.
He expected pressure on the lira to ease after the referendum, a major source of uncertainty for investors, and forecast inflation would drop to 8 percent at most by the end of the year, above the central bank's 6.5 percent forecast.
"VEILED TIGHTENING"
The central bank next meets to set interest rates on Jan. 24, with financial markets eager to see a sharp rise.
On Monday, the bank opted not to hold a repo auction for the third straight day. The daily auctions, at 8 percent, are an important source of funding for banks. Price quotations for the Borsa Istanbul repo market were also withdrawn after some funding was provided at 8.5 percent, bankers said.
By closing off these two taps the central bank would effectively force banks to borrow using its "late liquidity window" at around 10 percent, bankers said.
"The central bank withdrew the 8.5 percent quotation," the manager of a liquidity desk at one bank said.
"There is always the possibility it could offer a quotation again during the day. But if it does not give a quotation, banks will have to fund around 15 billion lira ($4 billion) above 8.5 percent - at 10 percent or at a rate near that."
The central bank has rolled out a series of measures to reduce liquidity and effectively drive up borrowing costs without hiking interest rates outright, in moves that some economists have referred to as "veiled" monetary tightening.
The bank halved borrowing limits on Friday on the interbank money market to 11 billion lira ($2.9 billion) in a further bid to support the currency.
An adviser to Erdogan said on Monday that the central bank has "strong weapons" other than interest rates and will continue to take measures in the face of the weaker lira.