Turkish lira outlook brightens after dollarisation in economy slows

Dollarisation in Turkey is slowing after the central bank raised interest rates and pledged to tackle double-digit inflation, bolstering the outlook for the beleaguered lira.

Total foreign exchange deposits at Turkish banks edged up by $167 million, or 0.06 percent, to $259.1 billion in the week to Dec. 11, the central bank said on its website. That growth compared with an average expansion of 0.8 percent in the previous five weeks.

The Turkish lira has slid to successive record lows this year after Turks bought dollars and euros to protect their savings against the erosive effects of inflation. The central bank said earlier this week that reversing this trend would be key to fighting price increases and helping to bolster the lira.

“It is critical that the public invest more of their savings in lira products,” central bank governor Naci Ağbal said in a presentation in Ankara on Wednesday. "While reversing dollarisation will take some time, this job falls on us. If we do things right, then savings will return to liras.”

Foreign investors in Turkey have added to the lira’s woes by pulling money out of the country this year. Economists say that the behaviour of local investors will be key to determining whether that capital will return.

Last week, President Recep Tayyip Erdoğan called on Turks to sell their foreign currencies to help support the lira and the economy.

Turkish residents have added almost $30 billion to their foreign currency deposits over the past year, according to central bank data.

Erdoğan hired Ağbal in early November and pledged economic reforms after the lira dropped to a record low of 8.58 per dollar. His predecessor, Murat Uysal, had kept interest rates at below annual inflation to help engineer a borrowing boom by businesses and consumers and to support the government’s economic growth plans.

Ağbal and his Monetary Policy Committee (MPC) hiked the benchmark interest rate to 15 percent from 10.25 percent on Nov. 19 to help rein in inflation and support the lira, which now trades at around 7.7 per dollar. The central bank meets again on interest rates on Dec. 24.

Annual inflation in Turkey accelerated to 14 percent last month from 11.9 percent in October. The higher price increases have raised expectations among investors that the central bank will hike rates again at next week’s MPC meeting.

Higher central bank interest rates will encourage Turks to save money in liras because banks are likely to increase interest rates on deposits, which have remained at or below the rate of inflation in recent months.

The full extent of dollarisation in Turkey is not known as many people traditionally keep dollars and euros “under the mattress” at home. Sales of home security safes have risen sharply over the past year as the dollarisation trend accelerated, according to local media reports.

Turkish banks are offering an interest rate on one-month lira deposits of as much as 16 percent, according to online price tracking company enuygun.com.