UPDATE 2-Turkish cbank ties monetary easing to export growth

* GDP growth seen rising to 4-5 pct in 2013

* Cbank taking cues from export growth

* CBank head sees inflation seen falling next year (Adds quotes, background)

By Nevzat Devranoglu

KOCAELI, Turkey, Sept 21 (Reuters) - Turkey's central bank expects economic growth to pick up next year and inflation to fall, but the extent to which this allows it to ease monetary policy will depend on how quickly exports grow, its head said.

Turkey's economy was the fastest-growing in Europe last year, expanding by 8.5 percent, but it has slowed this year as domestic demand has weakened, leaving policymakers trying to engineer a soft landing.

Speaking on Friday at a chamber of commerce event in the northwestern city of Kocaeli, bank governor Erdem Basci said the economy was expected to grow between 3-4 percent this year - just shy of a 4 percent government target - and 4-5 percent in 2013.

"Right now, the discussion is all about the (monetary) brakes. We are slowly loosening the brakes," Basci said. "If we were to instead release (the brakes) too much, domestic demand has unbelievable potential to grow in Turkey and the current account deficit would expand too. That's why we're proceeding carefully."

Turkey has proved relatively resistant to the slowdown that has blighted much of western Europe, partly because of a move by its firms to refocus on the Middle East and Africa, which has generated double-digit growth in exports.

While that has bolstered headline growth, it has done less to help government revenues because Turkey gives tax rebates to exporters as part of a policy to boost production.

"Turkey is quickly diversifying and moving to new markets. Exports will continue to increase next year ... We can only allow domestic demand to grow in line with the rise in exports," Basci said.

The central bank has had some success in its battle to bring down inflation, giving it scope to cut rates more aggressively, but the country also has a large shortfall on its current account.

Basci said the bank's inflation expectation for the end of the year was around 6.2 percent, although he expected it to fall to 5 percent by mid-2013. The annual inflation rate fell to 8.88 percent in August from above 11 percent in April. The central bank's inflation target is 5 percent for 2012 and 2013.

MAIN POLICY RATE CUT UNLIKELY

Basci said he saw no reason to put the brakes on loan growth any further and said that the lira currency was at "reasonable" levels, requiring no action from the central bank.

The central bank cut its overnight lending rate for the first time in seven months at Tuesday's monthly policy meeting, and hinted it could do more to try to cushion the slowdown in economic growth.

The bank cut the upper boundary of its interest rate corridor by 150 basis points to 10 percent, a bigger cut than economists had forecast, and took steps to keep loan growth in check to avoid overheating.

Some analysts have said they expect the bank to also cut the overnight borrowing rate, the lower boundary of the corridor.

Basci declined to comment, saying the central bank had given no such indication so far.

It has kept the one-week repo rate, its main policy rate, at an all-time low of 5.75 percent for more than a year and used the corridor to tighten monetary conditions.

Basci said the bank would only consider cutting its main policy rate if inflation fell below 5 percent or the lira strengthened sharply, or in the event of a "Lehman-style" bank crisis.

In August, the bank introduced a new policy tool - reserve option coefficients (ROCs) - expected to play a growing role in its strategy as it tries to manage lira volatility in the face of an expected rise in foreign capital inflows.

The coefficients, which the central bank revised on Tuesday, mean that lenders will have to provide proportionally more foreign exchange to the central bank the more of their lira reserves they choose to hold in foreign currency.

The policy, which the central bank says has not been used anywhere else in the world, will allow it to increase its forex reserves and free up lira liquidity without the need for direct intervention in the currency market.

Basci said the coefficients could be altered again but that the adjustments would not be indefinite.

"We won't play with these coefficients every time," he said.

(Writing by Nick Tattersall; Editing by John Stonestreet)