Barely six months after being forced to intervene to shore up the embattled lira, markets are betting that Turkey's central bank may loosen monetary policy to aid the government's economic growth target. That could undermine the credibility Turkey's rate setters worked hard to build as investors questioned their unorthodox policies to combat inflation and restore financial stability.

Traders already expect Governor Erdem Basci to cut borrowing costs for banks and encourage credit growth. That pushed the benchmark two-year bond yield down 12 basis points to 8.16% on Thursday, the lowest since October. Turkey's central bank has been varying interest rates daily between its benchmark rate of 5.75% and market rate of 11.5% since October to tame inflation and stabilise the lira. The funding rate has plummeted to about 8.5% in July from as high as 10.2% last month.