ANKARA, March 25 (Reuters) - Turkish individual investors who switched to foreign currency savings to avoid low interest returns on Turkish lira deposits played a major role in the currency’s biggest one-day fall since August, bankers said on Monday.
The lira fell at one stage more than 6 percent against U.S. dollar on Friday, a slump which traders attributed at the time to investor concern over a possible deterioration in relations between Turkey and the United States.
But Turkey’s central bank data has shown a relentless increase in foreign currency savings by local investors over the last six months, and Turkish bankers say below-inflation rates offered on lira deposits are driving savers towards dollars.
The latest Central Bank data show that local individuals’ foreign currency savings rose by $1.64 billion to a record high of $105.7 billion in the week to March 15 - a 23rd straight week of increases.
“This is the core problem. The Turkish authorities need to move fast to stop the one way dollarisation trend,” said Tim Ash, EM senior sovereign strategist at BlueBay Asset Management. “If locals don’t believe in their own currency, why should foreigners?”
As a result of government policy to lower borrowing costs for companies, banks have also curbed deposit rates in order to maintain profitability. Average interest rates on lira deposits are 19.07 percent, compared to inflation of 19.67 percent.
“Citizens aren’t stupid... Nobody will willingly carry money that is evaporating by the day in their pockets,” said Durmus Yilmaz, deputy leader of the opposition Iyi Party and a former central bank governor.
Some analysts said last week that Central Bank data showing the bank’s gross foreign exchange reserves fell by $5.6 billion to $73.78 billion in the first two weeks of March had also raised speculation it had been trying to support the lira, but the bank said it had been selling foreign exchange to energy importing firms and paying a foreign debt instalment.
On Sunday President Tayyip Erdogan warned that people who buy foreign currencies on the expectation that the lira would fall will pay a “very heavy price”. He also said Turkey would give hard time to those behind what he called “manipulative impositions” in the foreign exchange markets.
The lira, which closed 4 percent down on Friday, clawed back much of those losses on Monday after the Central Bank said it would use all its tools to stabilise prices.
On Monday the Central Bank decided to pause one-week repo auctions, a daily tool it used to provide liquidity to the market, translating to an increase in the average cost of funding by a minimum of 150 basis points from its current 24 percent policy rate, according to bankers.
Those measures will not be enough in themselves, said Inan Demir, senior emerging market economist at Nomura in London.
“The locals foreign exchange demand continues, and it is important to address their concerns, otherwise their demand continues and this tightening may prove ineffective,” Demir said.
Additional reporting by Karin Strohecker and Marc Jones in London Writing by Ezgi Erkoyun Editing by Dominic Evans