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UPDATE 2-Turkish markets fall after c.bank steps

By Ece Toksabay ISTANBUL, Nov 12 (Reuters) - The Turkish lira weakened on Friday after the central bank raised the lira reserve requirement and slashed the overnight borrowing rate in a move apparently aimed at discouraging speculative capital inflows. Shares also fell, hit partially by foreign market weakness, while bond yields were steady after weakening on Thursday due to European Union debt worries. The central bank increased the lira reserve requirement rate for banks to 6 percent from 5.5 percent on Friday. On Thursday evening, it kept its one-week repo policy rate constant at 7 percent and startled the market by slashing the overnight borrowing rate to 1.75 percent from 5.75 percent. "The harsh cut in the overnight borrowing rate is a surprise for the markets. On the other hand, the increased reserve requirement ratio should further limit the liquidity for banks hence will have a negative impact on margins," said Tera Research in a note. The lira traded at 1.4415, weakening from Thursday's close of 1.4230, while the benchmark bond yield was steady at 7.77 percent. There was little market reaction to the unemployment rate, which rose to 11.4 percent in the July-September period from 10.6 percent in the June-August period. "The unemployment figure is not back to pre-crisis levels yet, and it shows the influence of the crisis on the labour market is still there, but has weakened, in line with Central Bank labour market forecasts," said HSBC strategist Fatih Keresteci. The National ISE 100 index fell 1.49 percent to 69,042, in line with the MSCI index of benchmark emerging stocks , which dipped 1.64 percent. The fall was led by banking shares which dropped by 1.75 percent after the central bank moves. Garanti Bank fell 2 percent and Akbank dropped 2.7 percent ahead of the release of its third-quarter results. Turkish Central Bank Governor Durmus Yilmaz said on Friday after the hike in the reserve requirement that credit expansion did not currently point to the economy overheating but signalled that more rises could be on the way if loan growth escalates further. Turkish Airlines dropped 3 percent after it posted a 23 million lira net loss in third quarter, significantly underperforming forecasts. "The solid operating performance was overshadowed by higher than expected forex losses," Oyak Securities said. (Writing by Ece Toksabay; Editing by Ruth Pitchford) (ece.toksabay@reuters.com; +90 212 350 7052; Reuters Messaging: ece.toksabay.reuters.com@reuters.net)) Keywords: MARKETS TURKEY/ COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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