Declining inflation to boost Turkish lira deposits, central bank predicts

In a revealing blog post on Thursday, the Central Bank of the Republic of Türkiye (CBRT) outlined expectations for a continued rise in Turkish lira deposits, driven by a combination of declining inflation and strategic policy measures, despite a substantial exit from FX-protected accounts.

Shifting preferences towards Turkish lira

• Lira deposit growth: The share of Turkish lira deposits in total deposits surged from 48.4% to 51.8% during the July-August period, reflecting a growing confidence in the lira.
• Impact of tightening measures: This shift was accelerated by tightening steps taken in March, where the Central Bank increased its policy rate by 500 basis points, pushing the one-week repo rate to 50% to address deteriorating inflation.

FX deposit dynamics

• FX deposits rise: Despite the significant unwinding of $14 billion from FX-protected deposit (KKM) accounts, foreign currency deposits saw a modest increase of $3.3 billion between July and August.
• Role of current account surplus: The summer uptick in FX deposits was influenced by a surplus in the current account balance, which supported the demand for foreign currency holdings.

Strategic policy outcomes

• Accelerated KKM exit: The Central Bank’s efforts to reduce the reliance on KKM accounts led to an accelerated exit, particularly starting in April, as demand shifted towards lira-based assets.
• Stabilization of FX balances: The FX deposit balance is now stabilizing, signaling a potential plateau in the transition away from FX deposits as the lira becomes more attractive due to both market conditions and policy interventions.