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Turkey’s Renewed Appetite for Dollars Puts Goldman on Alert

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(Turkish central bank)

(Bloomberg) -- Turkish residents have started buying dollars again, complicating the central bank’s fight against one of the world’s highest inflation rates and putting investors including Goldman Sachs Group Inc. on alert for erosion in the value of lira assets.

Over the previous five weeks, residents’ FX deposits increased by $4.1 billion, with most of the demand coming from companies, according to Barclays Plc calculations from central bank and banking regulator data. In the past week, households joined in, accounting for more than half of the $1.7 billion rise in deposits.

That could mark an “important trend change,” according to Barclays economist Ercan Erguzel. Since March, FX deposits had dropped by some $24 billion as confidence grew in local-currency assets and in authorities’ ability to keep the lira relatively stable. The lira has declined by about 13% against the dollar this year, amounting to appreciation in real terms as monthly losses stayed below the inflation rate.

“Dollarization” is a long-running phenomenon in Turkey and a challenge for economic policymakers, with citizens frequently converting their lira savings to dollars, euros or gold to shield them from chronic inflation. The exchange rate is seen by the public as a barometer of the nation’s economic health, and sometimes even small losses in the lira can prompt significant changes in savings behavior. 

The start of dollarization is “indicative of worsening expectations, in our view,” said Goldman economists Clemens Grafe and Basak Edizgil. Goldman, which expects the first interest-rate cut by September, said the momentum in flocking to dollars and rise in inflationary pressures could lead to a delayed easing cycle. 

Some degree of conversions to dollar accounts was expected and is going according to plan at the time, according to a person with direct knowledge of Turkish economic policy. The person said the increase in dollar deposits comes as authorities and banks try to move Turkish savers out of the government’s so-called KKM lira savings program, which compensated for losses in the exchange rate, and as seasonal demand from corporates rises.

Deposit Rates

Officials have been trying to encourage more savings in liras by maintaining a tight monetary policy and ensuring that deposit rates are attractive and reflective of the higher rates. Still, the weighted average interest rate on lira deposits up to three months has been falling for the most part since peaking around 69% at the start of April, to 59% as of Aug. 9. 

In a sign of increased demand for US currency, traders at the Grand Bazaar in Istanbul were selling dollars at a higher rate than the interbank market rate on Wednesday morning. 

Earlier this week, state banks also increased FX sales to meet higher domestic demand, selling about $3 billion on Monday and Tuesday, according to traders who spoke on the condition of anonymity, citing institutional policy. Turkish lira offshore overnight rates jumped to 49.3% from 41.5% on Monday, a signal of the unwinding of some long positions.

The increased preference for dollars comes after inflation expectations from households picked up last month. They were already much higher than officials’ projected path.

The central bank said Tuesday that it would place even more emphasis on those expectations in shaping monetary policy. Officials have refrained from discussing the timing of rate cuts for the time being, saying they need to see improvement in expectations as well as a sustained decline in monthly inflation. 

Turkey Extends Rate Pause, Shifts Emphasis to Price Outlook

The Monetary Policy Committee’s statement on Tuesday signals “an intention to keep rates higher for longer, and reflect an aim to postpone expectations for easing steps to start in the near-term,” said Morgan Stanley economist Hande Kucuk. 

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