Turks are buying back the dollar, complicating the central bank’s battle against one of the world’s highest inflation rates and putting investors including Goldman Sachs Group (NYSE:GS) on alert over the lira’s ongoing erosion.
Over the previous five weeks, residents’ foreign currency deposits increased by $4.1 billion, with most of the demand coming from companies, according to Barclays (LON:BARC) plc calculations from central bank and banking regulatory body data. Last week, households joined, accounting for more than half of the $1.7 billion increase in deposits.
This could represent a “significant change in direction,” according to Barclays economist Erkan Ergozel. Since March, foreign currency deposits have fallen by about $24 billion as confidence in local currency assets and in the authorities’ ability to keep the lira relatively stable grew. The lira has fallen about 13% against the dollar this year, equivalent to the estimate in real terms as monthly losses have remained below the rate of inflation.
Dollarization is a long-standing phenomenon in Turkey and poses a challenge to economic policymakers, with citizens frequently converting their lira savings into dollars, euros, or gold to protect them from chronic inflation. The exchange rate is seen by the public as a measure of the health of a country’s economy, and sometimes even small losses in the lira can prompt significant changes in saving behavior.
Goldman economists Clemens Graf and Basak Edezgill said the start of dollarization was “a reason for a change in expectations, in our opinion.” Analysts, who expect the first rate cut by September, said a scramble for the dollar and rising inflationary pressures could delay the rate cut cycle.
This comes as the dollar is close to surpassing the 34 level against the lira, and is now rising by 0.3% to 33.94 pounds per dollar.
The euro is at 37.8 against the Turkish currency, up 0.1% on the day.
A gram of gold denominated in the Turkish currency is now at 2,735 liras, up 0.15%.
Read also:Japan’s MUFG expects the dollar to fall below the 140 level at this time
Officials are trying to encourage more lira savings by maintaining tight monetary policy and ensuring deposit interest is attractive and reflects higher prices. However, the average weighted interest rate on lira deposits for up to three months has mostly been falling since peaking at around 69% at the beginning of April, to 59% as of August 9.
In a sign of increased demand for the greenback, traders at Istanbul’s Grand Bazaar were selling dollars at a higher price than the interbank market rate on Wednesday morning.
Earlier this week, state banks also increased foreign exchange sales to meet higher domestic demand, selling about $3 billion on Monday and Tuesday, according to traders who spoke to Bloomberg.
The growing preference for the dollar comes after inflation expectations from households rose last month. It was well above the trajectory expected by officials.
Meanwhile, the central bank said on Tuesday it would place more emphasis on those expectations in shaping monetary policy. Officials declined to discuss the timing of the rate cut in
Morgan Stanley (NYSE:MS) economist Handy Kucuk said Tuesday’s MPC statement signals ‘the intention to keep interest rates higher for longer’.
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