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Turkey’s central bank announces plans to increase share of lira deposits in banking system

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Turkey’s central bank has announced plans to increase the share of lira deposits in the country’s banking system to 60 percent over the next six months, Reuters reported on Friday.

The bank also vowed to continue using regulations to support access to credit. Currently, lira deposits make up 53 percent of total deposits.

In its annual monetary policy report, the central bank confirmed it is maintaining its 5 percent medium-term inflation target, even as the annual inflation rate begins to decline from a 24-year high above 85 percent in October.

The bank said it would continue to use policies to permanently increase the weight of the Turkish lira on both the asset and liability sides of the banking system.

The central bank has previously implemented a policy to stabilize the currency, which has been pressured by interest rate cuts.

The bank reiterated that it has no exchange rate target level and will not buy or sell hard currencies to influence the lira.

Inflation in Turkey has surged since autumn of 2021 due to an unorthodox monetary easing cycle promoted by President Recep Tayyip Erdoğan to boost economic growth and investment, but which also caused a historic currency crash late last year.

As of last week, hard currencies made up 47 percent of all deposits in the banking system, down from 65 percent a year ago due to regulations aimed at discouraging the use of foreign currencies, including state-backed, depreciation-protected lira deposits.

The lira has steadied since August, aided by indirect foreign exchange sales to the market, and inflation is expected to fall sharply next year, with some economists predicting it will drop to 40 percent by the time Erdoğan faces presidential and parliamentary elections, likely in June.

In its report, the central bank also said it would ensure a steady increase in international reserves to support the lira. Analysts expect the current 9 percent policy rate to remain steady until the elections, after which it will depend on whether Erdoğan is re-elected.

The opposition has promised a return to orthodox policies and rate hikes.

The central bank projects that inflation will drop to 65.2 percent by the end of 2022, largely due to base effects in December, compared to a median estimate of 69 percent in the latest Reuters poll.

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