Citi Bank suggests Turkish currency as the central bank hints at significant interest rate reduction
Turkey's foreign exchange (FX) reserves have been on an upward trajectory, reaching record levels, as reported by the Central Bank of the Republic of Turkey (CBRT). By mid-July 2025, gross reserves had surpassed the $168.6 billion mark, marking a significant weekly gain of $2.3 billion around July 18. Net reserves excluding FX swap agreements stood at an impressive $44.3 billion [1][3].
This increase in reserves can be attributed to foreign portfolio inflows and improved reserve management. The CBRT's foreign currency holdings have risen to $83.3 billion, while gold reserves have seen a growth of $574 million to $85.27 billion [1][3].
On the monetary policy front, the CBRT has adopted a hawkish stance, with the benchmark policy rate hiked to 46% in April 2025. This aggressive tightening is aimed at controlling inflation and stabilizing the lira, a move that has seen overnight lending rates reach 49% and borrowing rates hover around 44.5% by July 2025 [4].
Investment banks like Citi recommend a cautious approach, acknowledging that the Central Bank’s strategy hinges on using asymmetric liquidity tools. These tools include different reserve requirement ratios for Turkish lira and foreign currency deposits, aiming to encourage a shift from FX holdings to lira assets [5]. However, this approach raises risks of liquidity crunches in sensitive sectors like construction and automotive.
Despite the robust reserves and tight monetary policy, political risks remain a factor due to potential pressure on central bank independence. So far, the CBRT has maintained a hawkish stance consistent with recent reforms [5].
Looking ahead, a policy rate cut of at least 250 basis points is widely anticipated at the Turkish central bank's Monetary Policy Committee meeting on Thursday [6]. Citi has emphasized its positioning through a three-month forward short position on the U.S. dollar against the Turkish lira [7].
In other news, Citi has issued positive guidance for Poland's 10-year local bonds and Egypt's three-month treasury bills [8]. The bank also issued a buy recommendation for the Turkish lira on Wednesday [9]. As of 1:40 p.m. GMT on July 23, the U.S. dollar was trading at 40.4539 against the Turkish lira [10].
References:
- CBRT Press Release
- CBRT Annual Report
- Citi Research Note
- CBRT Monetary Policy Decision
- Citi Research Note
- Bloomberg News Article
- Citi Research Note
- Citi Research Note
- Citi Research Note
- FX Street News
- Investment bank Citi recommends a cautious approach towards investing in Turkey, recognizing the Central Bank of the Republic of Turkey's (CBRT) strategy which utilizes asymmetric liquidity tools, such as different reserve requirement ratios for Turkish lira and foreign currency deposits, to encourage a shift from FX holdings to lira assets.
- Despite the hawkish stance adopted by the CBRT, political risks persist due to potential pressure on central bank independence, as highlighted by Citi in its research note.
- In contrast to Turkey, Citi has issued positive guidance for Poland's 10-year local bonds and Egypt's three-month treasury bills, and also issued a buy recommendation for the Turkish lira on Wednesday.
