A recent Deutsche Bank analysis on dollarization trends in Türkiye suggests that attractive real interest rates, low volatility in the Turkish lira (TL), and strong Central Bank of Türkiye (TCMB) reserves—along with the ongoing tight monetary policy—will continue to support investor confidence in TL in the near term.
While the bank’s economists acknowledge some signals of dollarization, they believe that interest in TL will persist in the short term.
Risk of Dollarization Amid Interest Rate Cuts
In a March 5 report, Deutsche Bank Economist Yiğit Onay and Strategist Christian Wietoska discussed how the start of an easing cycle and interest rate cuts could reignite dollarization among domestic investors. This, in turn, could potentially reverse the Central Bank’s foreign exchange position gains and put pressure on the Turkish lira.
The report highlighted that the increase in foreign currency purchases by local investors in February raises concerns that the trend observed since March 2024 may reverse.
Deutsche Bank: Rising FX Demand Is Likely Temporary
Deutsche Bank noted that the recent rise in local demand for foreign exchange is likely due to temporary and/or seasonal factors and should not be interpreted as a structural shift in sentiment toward TL.
However, the bank acknowledges the risk that domestic investors may increase their demand for foreign currency if interest rate cuts continue, considering the short-term nature and fragility of TL positions.
TCMB May Slow or Pause Rate Cuts
According to Deutsche Bank economists, if inflation remains sticky and expectations for real interest rate declines persist, the Central Bank of Türkiye may slow or pause its easing cycle within a few months to counterbalance potential pressure from increased FX demand by domestic investors.
This outlook, the report states, is a key argument for a more hawkish stance on TCMB interest rates compared to current market pricing.
source: Bloomberght/ Prepared by: İlayda Gök