ISTANBUL - Gradual interest rate cuts in Turkey next year will boost the banking sector and support demand for Turkish lira assets, Garanti BBVA bank Chief Executive Mahmut Akten said in an interview.

Last week, the central bank cut its policy rate by 250 basis points to 47.5%, marking a change in course after an 18-month tightening cycle that sought to address the impact of years of unorthodox economic policy.

During the tightening, banks experienced a sharp decline in credit growth and profitability, with margins held down by increasing interest rates, credit restrictions and macroprudential measures.

Akten said the results of a normalisation in economic policies in 2024 will become more visible next year.

"We expect a more positive picture for the banking sector, especially in the second half of the year. Gradual interest rate cuts will positively affect the credit-deposit spread and the trend in margins," he said in written responses to Reuters questions.

The easing cycle is meant to end protracted economic turmoil and a cost-of-living crisis. Rate cuts are expected to total 2,150 basis points by end-2025, a Reuters poll found.

Garanti BBVA is Turkey's second largest private bank with consolidated assets of 2.88 trillion lira ($86 billion) as of end-September.

MEAGRE PROFITS

Turkish banks' profits increased a meagre 5% in the first nine months, far below inflation of 49% in September. Garanti's net income was up 16% at 67 billion liras in the first nine months.

Akten said the course of inflation, currently at 47%, and continuing credit growth restrictions will determine growth dynamics and it would be realistic to expect real credit growth to come in 2026, rather than in 2025.

He said the bank expected continued normalisation in the cost of risk next year, with the sector focused on risk management.

As the banking sector struggled against the macroprudential measures and increased funding costs, lira loan growth this year remained below inflation and contracted in real terms, he said.

A decrease in exchange rate volatility and increasing demand led to forex loan growth reaching the same level as lira loan growth, he said.

Akten expected Turkey to benefit more from global capital flows if central banks continue to support global liquidity conditions, Turkey's credit ratings increase and CDS (credit default swap) levels decrease.

(Reporting by Ebru Tuncay; Writing by Daren Butler; Editing by Jonathan Spicer and Barbara Lewis)