* C.bank chief warns too early to say recovery started * Halts foreign exchange sale auctions * Sees industrial production drop ending in Q1 * May lower reserve requirement rate for banks
(Adds forex auction, IMF)
By Selcuk Gokoluk
ANKARA, April 2 (Reuters) - Central Bank Governor Durmus Yilmaz said on Thursday there were expectations that Turkey's ailing economy was improving, but warned it was too early to say a recovery had started.
Turkey's once-booming economy shrank for the first time in seven years in the fourth quarter of 2008 by 6.2 percent, as domestic demand and exports have been severely hit by the effects of the global economic crisis.
In a speech to industrialists and businessmen in the Mediterranean city of Antalya, Yilmaz said he expected a fall in Turkey's industrial output to end at the end of the first quarter of 2009.
Industrial production tumbled 21.3 percent year-on-year in January, its sharpest decline in 12 years. Analysts say Turkey's economy will shrink sharply in 2009 due to sliding industry output and foreign trade.
Yilmaz said he saw a gradual recovery in domestic demand.
"Despite the recent rise in public spending, the recovery in domestic demand is expected to be incremental and slow," he said in a speech broadcast on the CNBC-e channel.
Unemployment, which is at a record 13.6 percent, is seen rising in the first quarter, he warned.
Despite the crisis, Yilmaz said volatility in Turkish shares and the lira was limited compared to its emerging markets peers in eastern Europe. He said Turkey's credit rating should be revised upwards.
The bank later on Thursday said in a statement it would halt its daily $50 million foreign exchange sale auctions from Friday, citing improved global markets and easing worries on the Turkish foreign exchange market.
The bank has sold $900 million since March 20, striving to boost forex liquidity in the Turkish markets. The statement said it might resume the auctions if necessary.
LOWER RESERVE
The Central Bank may consider reducing reserve requirement ratios for the banks, and there is room for lowering forex-denominated reserve requirement ratios in order to boost liquidity in the market, Yilmaz said.
Yilmaz called on the government to sign a loan accord with the International Monetary Fund "as soon as possible", while Prime Minister Minister Tayyip Erdogan was scheduled to meet top IMF officials in London during the G20 summit.
Negotiations between Turkey and the IMF were suspended in January because of differences over some key fiscal reform steps including an autonomous tax administration.
The bank can also buy directly government debt from the banks if believes that the liquidity shortage is a permanent problem. The Turkish Central Bank may bring a technical rate cut forward, Yilmaz said, referring to its lending rate cuts.
"The Central Bank is currently a net debtor in the market and Yilmaz thinks that as liquidity drains it might become a net creditor and hence the bank's lending rate rather than its borrowing rate might become the relevant policy rate," said JP Morgan Chase analyst Yarkin Cebeci in a note.
"Currently, the bank's borrowing rate is at 10.50 percent and its lending rate is at 13.00 percent, Yilmaz's statement implies that the lending rate could fall towards 10 percent in the coming months (and thus the borrowing rate towards 9.0 percent)."
The financial markets take the bank's overnight borrowing rate as the benchmark interest rate, but the Central Bank aims to turn the lending rate into the benchmark rate through what it calls technical rate cuts. (Editing by Andy Bruce; Editing by Ron Askew)