* More cenbank easing sought after 425-basis point cut
* Lenders eye dollarisation, wary after booking losses
* Hard-hit construction sector wants 'room to breathe'
By Ceyda Caglayan and Ebru Tuncay
ISTANBUL, Aug 2 (Reuters) - Turkish borrowing costs havebegun falling after the central bank slashed interest rates lastweek, but companies say more monetary stimulus and bank lendingwill be needed to kick-start the recession-hit economy afterlast year's currency crisis.
A key question is how keen banks will be to lend afterTurkey's policy rate was lowered to a still-high 19.75%, from24%. But the resulting drop of about a fifth in deposit ratesmay not be enough for builders, car dealers and retailers hungryfor Turks to start spending again.
One hurdle is a nearly year-long dollarisation trend inwhich Turks have dumped lira for more stable foreign currencies.More than half of all deposits are now non-lira, hurting banks'ability to extend lira loans and suggesting demand for creditmay not revive any time soon in the $766-billion economy, amongthe largest in emerging markets.
That is bad news for companies, especially those in thehard-hit construction sector, which is most anxious for mortgagecosts to drop.
"There is a need for further interest rate cuts," saidMahmut Tugsuz, chairman of mid-sized Istanbul constructioncompany Cathay Group. "If the central bank strengthens this stepwith another cut in September there will be room to breathe foreveryone."
Cheap foreign credit financed years of a construction-drivenboom that collapsed last year when the lira dropped some 30%against the dollar, sparking the recession.
Plagued by bad debt and scarce demand, the sector will onlybegin to revive when inflation falls to 10% from above 15% now,and housing credit rates drop to 13-14%, Tugsuz said.
It is unclear how long that will take. Economists predictthe central bank will cut its policy rate to around 16-17% byyear end.
Last week's rate cut https://tmsnrt.rs/32NfGfN was the firstchange since last year's crisis sent the currency tumbling andinflation soaring, forcing the central bank to aggressivelytighten policy.
On Thursday and Friday, state-owned banks Ziraat Bankasi,Vakifbank and Halkbank lowered rates onhousing, consumer and corporate loans. Central bank data showeddeposit rates started falling to some 16% at certain banks, froman average of 21%.
This should give some relief to large companies that havesought to restructure debt. In the construction and energysectors alone, there is some $20 billion in bad debt, andReuters reported last month that plans have been delayed tosafely move it off banks' balance sheets.
"This interest rate cut will certainly benefit companies interms of loan repayments and restructurings," said Burak Ovuncsaid, chief executive of shoe retailer FLO. He estimated itamounted to a roughly 20% discount from prior borrowing costs.
DOLLARISATION HURDLE
Turkey has introduced taxes to curb dollarisation, which,along with political uncertainty and the risk of U.S. sanctions,sparked a two-month lira selloff this year.
Of the 2.27 trillion lira ($407 billion) of banking sectordeposits as of June, a record 54% were in foreign currency,according to the banking watchdog.
This loss of faith in the local currency has prompted banksto increasingly turn to FX swap markets to bulk up on lira, andin turn to write off related losses, according to analysts.
Garanti BBVA, the fourth-largest Turkish bank, recorded 3.3billion lira in swap-related losses in the second quarter, andZiraat about 3 billion.
"Banks have been writing off losses from swap transactionssince the start of this year," said Ovunc Gursoy, a bankinganalyst at TEB Yatirim, a securities firm.
"They will have to resort to swaps to extend lira loans. Buteven though they would like to increase credit volume, they willtake swap costs into consideration."
A fall in inflation expectations could help shift savingsback to lira, which would free up lending, analysts and bankerssaid. "But right now ...there is not a trend like that," Gursoyadded.
Tugsuz, of the Cathay Group, said banks were citing a lackof resources in denying some loan requests.
In the automotive sector, despite some relief from tax cuts,sky-high interest rates caused sales to plunge 47.5% to 213,000vehicles in the first seven months of 2019.
When loan rates in the sector were around 1%, the marketgrew strongly. But rates shot up to between 2.3-3% this year,said Murat Sahsuvaroglu, head of Turkey's Automotive DealerAssociation.
After the rate cut they fell toward 1.7%, but they need todrop below 1.5% to bring relief to the market, he said.
With deposit rates so high, prospective buyers are choosingto park money there instead of buying a vehicle that wouldimmediately depreciate.
"If (interest) rates fall and banks approve consumer creditapplications, we think that sales will reach to 400,000-450,000vehicles" Sahsuvaroglu said.
($1 = 5.5730 liras)
(Additional reporting by Can Sezer and Ezgi Erkoyun; Writing byJonathan Spicer; editing by John Stonestreet)