Economy in Turkey: Dollarization Trend Accelerates in the Last 1.5 Months

Dollarization Gains Momentum Despite High TL Rates

In the past month and a half, the dollarization trend in Turkey has gained remarkable speed. According to QNB economists, domestic residents’ foreign exchange deposits—adjusted for parity effects—rose by $5.8 billion, while foreign currency-based funds increased by $4.2 billion. During the same period, the Central Bank’s foreign exchange sales approached $10 billion, even though total reserves reached record highs, largely due to soaring gold prices.

This shift toward the dollar happened despite high Turkish lira (TL) deposit rates, a strong TL, and the end of the currency-protected deposit scheme. Political and economic uncertainties, both domestic and international, further fueled the move toward foreign currency.

Central Bank Reserves at Record Highs — Gold Drives the Surge

The Central Bank’s total reserves climbed to a record $189.7 billion as of the week ending October 10, driven by a sharp rise in gold prices. QNB economists noted that while total reserves appeared robust thanks to gold, the picture wasn’t as positive from a foreign exchange perspective.

Their report highlighted that after a significant policy shift in April, the Central Bank purchased $35.1 billion in foreign currency between May and August. However, this was followed by estimated sales of $8.6 billion in September and $3.1 billion in the first half of October — despite an estimated $1 billion current account surplus during the same period.

Domestic FX Deposits and Funds Rise Nearly $10 Billion

Data shows that from late August to October 10, domestic residents’ foreign exchange deposits rose by $5.8 billion when adjusted for parity and gold effects. Individual accounts increased by $2.55 billion, while corporate accounts grew by $3.23 billion.

So far this year, total foreign currency deposits have risen by $17.86 billion, with individuals contributing $5.89 billion and companies $11.97 billion to the increase.

QNB economists also reported that foreign-currency-based investments in pension and mutual funds rose by $7.5 billion in the last 1.5 months. When the gold price effect is removed, the net increase stands at $4.2 billion — meaning domestic residents’ total foreign currency assets grew by about $10 billion, explaining much of the Central Bank’s FX sales.

TL Deposit Share Declines

While foreign exchange holdings increased, the share of standard TL deposits fell. According to Banking Regulation and Supervision Agency (BDDK) data, as of October 10, standard TL deposits (excluding KKM) stood at 14.65 trillion lira, up only 114.3 billion lira from 1.5 months earlier. Their share in total deposits fell from 60.66% at the end of August to 59.29%.

Interest Rate Cut Didn’t Lower Deposit Rates

Despite a recent 250 basis point policy rate cut, TL deposit rates remained high due to regulatory targets set by the Central Bank. Banks with less than 60% of deposits in TL were required to increase their share, keeping deposit rates elevated.

QNB economists emphasized that the dollarization trend has now become the main factor influencing deposit rates. They added that expectations about inflation and the Central Bank’s credibility are the key drivers of this behavior.

Their report suggested that while markets expect another 150 basis point rate cut in the upcoming Monetary Policy Committee meeting, the Central Bank is likely to keep rates unchanged, as further easing amid rising inflation could backfire and push market rates higher.

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