Falling inflation will boost Turkish lira deposits, central bank predicts

In an insightful blog post on Thursday, the Central Bank of the Republic of Turkey (CBRT) said it expected Turkish lira deposits to continue to rise despite a significant withdrawal from FX-protected accounts, due to a combination of falling inflation and strategic policy measures.

Shift in preferences towards the Turkish lira

• Growth of lira deposits: The share of Turkish lira deposits in total deposits increased from 48.4% to 51.8% in July and August, reflecting growing confidence in the lira.
• Effects of the tightening measures: This change was accelerated by the tightening measures introduced in March. In response to rising inflation, the central bank raised its policy rate by 500 basis points and pushed the one-week repo rate to 50%.

Dynamics of foreign currency deposits

• Increase in foreign currency deposits: Despite the significant unwinding of US$14 billion in foreign exchange protected deposits (FCDs), there was a modest increase of US$3.3 billion in foreign currency deposits between July and August.
• Role of the current account surplus: The increase in foreign currency deposits in the summer was due to a current account surplus, which supported demand for foreign currency holdings.

Strategic policy outcomes

• Accelerated KKM phase-out: The central bank's efforts to reduce reliance on KKM accounts led to an accelerated exit, especially from April, when demand shifted towards lira-based assets.
• Stabilization of foreign exchange balances: The foreign exchange deposit balance is currently stabilising, indicating a potential plateau in the move away from foreign exchange deposits as the lira becomes more attractive due to market conditions and policy interventions.