Adds Barclays, volatility, updates prices
ISTANBUL, March 1 (Reuters) - The Turkish lira soared 2.5% in volatile trade on Monday, rebounding decisively from its worst weekly loss in 2-1/2 years, as U.S. bond yields eased and data showed the Turkish economy was one of only a few globally to expand last year.
The currencyTRYTOM=D3 strengthened as far as 7.225 against the dollar and was at 7.2575 at 1513 GMT, while Istanbul's main stock index jumped 3.5%.
Leading all emerging market peers, the lira was on track for its sharpest rally since early November when the central bank chief and finance minister were abruptly replaced, raising expectations of a more orthodox policy approach.
A volatility gauge TRY1MO= jumped to December levels after a rocky few days including a more than 5% drop last week, its worst since the height of a currency crisis in August 2018.
After years pulling back, investors have tip-toed back into Turkish assets since the November leadership overhaul that led to sharp interest rate hikes and a promise by President Tayyip Erdogan of a new market-friendly era.
The economy grew a less-than-expected but still hot 5.9% in the fourth quarter and 1.8% in 2020 as a whole, according to data showing Turkey joined China as large economies to have avoided a contraction amid the pandemic.
After the data, Goldman Sachs cut its 2021 economic growth projection for Turkey to 5.5% year-on-year from 6.0%, while Barclays lifted its forecast to 4.4% from 3.6%.
A burst of state-driven credit last year drove the growth. But it also exacerbated a record drop in the lira, double-digit inflation and a drop in Turkey's FX reserves.
Barclays said an expecting economic slowdown in the first half of this year "may not be sufficient to deliver a major correction on the external balance, especially if energy prices remain high".
The central bank hiked the policy rate by 675 basis points to 17% late last year, sparking a currency rally that outstripped EM peers until mid-February, when a global bond market rout sucked funds out of riskier assets.
U.S. bond yields eased on Monday, bringing relief across EMs.
Tim Ash of BlueBay Asset Management said last year's growth posed risks for Turkey. "The price is the FX devaluation, the loss in dollar GDP and the huge loss in FX reserves which has left huge structural vulnerabilities now which the CBRT is having to address via higher policy rates," he said.
(Reporting by Daren Butler and Jonathan Spicer; Editing by Dominic Evans)
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