The decline in inflation over the next months will further boost the rise in the share of Turkish lira deposits, according to a post on the blog of the Turkish central bank on Thursday, evaluating the developments in recent months, including the reduction in the FX-protected deposit balances.

The share of lira deposits in total deposits grew from 48.4% to 51.8% over the last two months, read the blog post by researchers and economists working at the bank.

Tightening steps taken in March spurred a preference shift toward Turkish lira deposits in April and May, it said.

At its March meeting, the Central Bank of the Republic of Türkiye (CBRT) surprisingly hiked its policy rate, also known as the one-week repo rate, by 500 basis points to 50% "in response to the deterioration in the inflation outlook."

Since then, the bank has kept the benchmark rate unchanged while vowing to hike more if the outlook worsens.

"Considering the lagged effects of the monetary tightening, the committee decided to keep the policy rate unchanged but reiterated that it remains highly attentive to inflation risks," the bank said after its latest meeting this Tuesday.

While preferences for the Turkish lira are strengthening, FX deposits rose during summer as the current account balance posted a surplus, the blog post of the central bank highlighted.

Another important factor contributing to the rise in FX deposits is the accelerated exit from FX-protected accounts or the so-called KKM scheme driven by recent policy measures, it added.

Amid the shift in policymaking last year, authorities began to unroll the scheme, and the volume under these accounts has consequently regressed.

Beginning in April, the decline in KKM accounts gained pace, the blog post further read, driven by both residents’ and non-residents’ increased demand for Turkish lira assets, improvements in central bank reserves and the CBRT’s efforts to curb the KKM supply and demand.

It noted that despite the unwinding of $14 billion in KKM balances, FX deposit balances rose by only $3.3 billion in July-August.

"Following a rapid shift from FX deposits to TRY (lira) deposits, the FX deposit balance is stabilizing amid the accelerated exit from KKMs," it said.

"The decline in inflation over the next months will further boost the rise in the share of TRY deposits."

Annual inflation began dipping in June and fell below 62% last month in what is expected to be a gradual, lasting decline.