Adds Citi note

June 5 (Reuters) - Turkish consumer price inflation was slightly higher than expected in May, data showed on Friday, highlighting price fallout from the U.S.-Iran conflict and focusing attention on the monetary policy outlook.

In May, consumer prices increased 1.71% monthly and 32.61% annually, official data showed.

In a Reuters poll, monthly inflation was forecast to be 1.63%, with the annual rate seen at 32.50%. The war has slowed disinflation expectations in the market and at the central bank, which some analysts believe could consider raising interest rates next week.

In April, inflation rose 4.18% monthly and 32.37% annually, both above forecasts.

The poll's median estimate for end-2026 annual inflation was 29%, easing slightly but remaining well above the central bank's projections.

"Although geopolitical risks and volatility in energy prices continue to exert pressure on the inflation outlook, we have limited these effects with the steps we have taken," said Finance Minister Mehmet Simsek on X.

The central bank raised its year-end interm inflation target to 24% from 16% last month, forecasting that the short-term inflationary effects of the Iran war would remain "pronounced", as the war-related surge in energy prices has rattled countries like Turkey that rely on energy imports.

INTEREST RATE OUTLOOK

The revisions came after the bank kept its key interest rate at 37% in April, holding steady for the second successive policy meeting despite some expectations for a tightening of policy.

Governor Fatih Karahan has said the central bank needed to focus on short-term inflationary impacts for now to hinder a deterioration in the inflation outlook, adding all options were on the table.

The bank had slashed rates by 900 basis points in the second half of last year before slowing the easing in January of this year, and has since held the policy rate steady.

Citi said in a note that recent price developments point to a more challenging inflation outlook than projected in the central bank's (CBT) latest inflation report.

"While our analysis makes a case for an adjustment in the pace of depreciation accompanied by a rate hike, we expect the CBT to keep rates on hold at the next MPC meeting" Citi said, projecting that the policy rate will end the year at 35%, compared with a market consensus of 33.5%.

Goldman Sachs said in a recent research note that the ongoing deterioration in the underlying balance of payments trend is likely to prompt the central bank to tighten financial conditions, most likely through loan growth restrictions rather than policy rates.