By Daren Butler ISTANBUL, Nov 12 (Reuters) - Turkey's central bank raised lira reserve requirements on Friday in a step that will withdraw 2.1 billion lira ($1.4 billion) from the market, and signalled more rises could be on the way if loan growth escalates further. The move comes on the heels of the central bank's decision late on Thursday to slash the overnight borrowing rate by 400 basis points, in order to encourage investors to hold lira deposits for longer. The increase, part of the bank's exit strategy from measures implemented to help Turkey cope with the effects of the 2008 global financial crisis, had been widely expected by analysts. More moves are likely, the central bank indicated. "The reserve requirement rates could be used more actively if the growth in loans threatens financial stability," Central Bank Governor Durmus Yilmaz told a conference. The bank said in a statement earlier that the lira rate was raised to 6.0 percent from 5.5 percent after taking in account recent rises in loans. The reserve requirement for foreign currencies remained at 11 percent. The bank had raised the lira reserve requirement to 5.5 percent from 5.0 percent in September and said last month it may raise it to 6 percent by year-end. "We see that the bank decided to act sooner rather than later, and this shows the nervousness and determination of the bank," JP Morgan economist Yarkin Cebeci. "We believe that the bank is seriously worried about the fast loan growth and robust domestic demand," he said. Loan volumes in the Turkish banking system have surged 23 percent so far this year and stood at 488 billion lira ($339 billion) at the end of October, according to data from the Turkish Banking Association. The lira weakened to 1.436 against the dollar in early interbank trade on the back of the central bank moves, from a spot close of 1.423 on Thursday. In Thursday's interest rate statement, the central bank said it was appropriate to proceed with the remaining measures in its exit strategy, which included raising lira reserve requirements. The bank left its one-week repo policy rate unchanged after Thursday's monetary policy committee meeting as expected. SPECULATIVE LIRA INFLOWS Analysts said the borrowing rate cut was designed to deter short-term investors from betting on appreciation of the lira, which has firmed 5 percent against the dollar this year. The move would also encourage banks to lend more to each other. The bulk of foreign money is parked overnight in the money market. In a related step, the bank on Thursday also cut the late liquidity window borrowing rate to zero from 1.75 percent. The decision to cut both rates sends a signal the central bank wants to discourage investors from holding short-term deposits, Danske Bank chief analyst Lars Christensen said. "This seems to be a manoeuvre designed to reduce the speculative capital and portfolio inflows into the lira coming from international investors," he said. "The actions from the central bank in our view clearly increase the risk of a larger negative correction in the Turkish lira -- a risk that is being exacerbated by the combination of what is clearly an overvalued lira and renewed European debt worries," he added. The one-week repo rate remained at 7 percent, while the overnight borrowing rate was cut to 1.75 from 5.75 percent and the overnight lending rate was left unchanged at 8.75 percent. ($1=1.4360 lira) (Writing by Daren Butler, additional reporting by Nevzat Devranoglu, editing by Sujata Rao) Keywords: srTURKEY CBANK/ (firstname.lastname@example.org; +90 212 350 7057; Reuters Messaging: email@example.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.
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