* 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 have begun falling after the central bank slashed interest rates last week, but companies say more monetary stimulus and bank lending will be needed to kick-start the recession-hit economy after last year's currency crisis.
A key question is how keen banks will be to lend after Turkey's policy rate was lowered to a still-high 19.75%, from 24%. But the resulting drop of about a fifth in deposit rates may not be enough for builders, car dealers and retailers hungry for Turks to start spending again.
One hurdle is a nearly year-long dollarisation trend in which 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 credit may not revive any time soon in the $766-billion economy, among the largest in emerging markets.
That is bad news for companies, especially those in the hard-hit construction sector, which is most anxious for mortgage costs to drop.
"There is a need for further interest rate cuts," said Mahmut Tugsuz, chairman of mid-sized Istanbul construction company Cathay Group. "If the central bank strengthens this step with another cut in September there will be room to breathe for everyone."
Cheap foreign credit financed years of a construction-driven boom 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 only begin 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 predict the central bank will cut its policy rate to around 16-17% by year end.
Last week's rate cut tmsnrt.rs/32NfGfN was the first change since last year's crisis sent the currency tumbling and inflation soaring, forcing the central bank to aggressively tighten policy.
On Thursday and Friday, state-owned banks Ziraat Bankasi, Vakifbank and Halkbank lowered rates on housing, consumer and corporate loans. Central bank data showed deposit rates started falling to some 16% at certain banks, from an average of 21%.
This should give some relief to large companies that have sought to restructure debt. In the construction and energy sectors alone, there is some $20 billion in bad debt, and Reuters reported last month that plans have been delayed to safely move it off banks' balance sheets.
"This interest rate cut will certainly benefit companies in terms of loan repayments and restructurings," said Burak Ovunc said, chief executive of shoe retailer FLO. He estimated it amounted to a roughly 20% discount from prior borrowing costs.
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 sector deposits 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 banks to increasingly turn to FX swap markets to bulk up on lira, and in turn to write off related losses, according to analysts.
Garanti BBVA, the fourth-largest Turkish bank, recorded 3.3 billion lira in swap-related losses in the second quarter, and Ziraat about 3 billion.
"Banks have been writing off losses from swap transactions since the start of this year," said Ovunc Gursoy, a banking analyst at TEB Yatirim, a securities firm.
"They will have to resort to swaps to extend lira loans. But even though they would like to increase credit volume, they will take swap costs into consideration."
A fall in inflation expectations could help shift savings back to lira, which would free up lending, analysts and bankers said. "But right now ...there is not a trend like that," Gursoy added.
Tugsuz, of the Cathay Group, said banks were citing a lack of 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 213,000 vehicles in the first seven months of 2019.
When loan rates in the sector were around 1%, the market grew strongly. But rates shot up to between 2.3-3% this year, said Murat Sahsuvaroglu, head of Turkey's Automotive Dealer Association.
After the rate cut they fell toward 1.7%, but they need to drop below 1.5% to bring relief to the market, he said.
With deposit rates so high, prospective buyers are choosing to park money there instead of buying a vehicle that would immediately depreciate.
"If (interest) rates fall and banks approve consumer credit applications, we think that sales will reach to 400,000-450,000 vehicles" Sahsuvaroglu said.
($1 = 5.5730 liras)
Additional reporting by Can Sezer and Ezgi Erkoyun; Writing by Jonathan Spicer; editing by John Stonestreet