Short-term Turkish lira interest persists amid dollarization signals, says analysts

Short-term interest in the Turkish lira is likely to continue as there are some signals of dollarization in Türkiye, Germany-based Deutsche Bank’s Turkish economists said.

A report released on Wednesday by Deutsche Bank economist Yigit Onay and strategist Christian Wietoska examined the risks associated with the start of the monetary easing cycle, highlighting that a decline in policy rates could trigger renewed dollarization among domestic investors.

This could potentially reverse the Central Bank of the Republic of Türkiye’s (CBRT) net foreign exchange position gains and put pressure on the lira, the report noted.

The economists pointed out that rising foreign currency purchases by local investors in February have fueled concerns that the trend observed since March 2024 could reverse.

The recent increase in local demand for foreign currency can largely be attributed to temporary or seasonal factors, emphasizing that this should not be seen as a structural shift in sentiment against the lira.

Persistent inflation may slow interest cuts

However, the bank warned that given the short-term nature of local investors’ lira positions and the fragility of their expectations, the risk of increased foreign currency demand among domestic investors remained as interest rate cuts continue.

According to Deutsche Bank economists, the persistence of high inflation and expectations of lower real interest rates may prompt the CBRT to slow or pause the easing cycle in the coming months to counter potential pressure from domestic foreign currency demand.

The report concluded that this scenario serves as a key argument for a more hawkish outlook on CBRT’s interest rate policy compared to current market pricing.

As of Thursday, 1 p.m. GMT, USD/TRY exchange rate stood at 36.42.