The Central Bank of Turkey’s latest survey indicates rising inflation expectations, with figures reaching 31.8% for end-2025, up from 29.9% in the previous survey. This surpasses the bank’s forecast ceiling of 29.0%. Minister Mehmet Simsek forecasts a 30% inflation rate by the year’s end, with external factors like frost affecting food prices being blamed for inflation increases.
Market estimates for future inflation have also risen, with 12-month predictions at 23.3% and 24-month forecasts at 17.4%. These shifts suggest a pattern where initially optimistic forecasts adjust upwards as target dates approach. Despite inflation pressures, it is anticipated that the Central Bank of Turkey will continue reducing interest rates to 39.0% now and further to 37.7% by December.
The Lira and Inflation Pressure
The lira is depreciating rapidly, at a 40% annualised rate against a basket of USD and EUR, adding to the inflation pressure. Rate cuts are seen as a necessity due to potential policy constraints. As a result, secondary policy measures may become more relevant should inflation accelerate. The fundamentals of the lira remain weak, suggesting potential volatility in the currency market.
Inflation expectations are getting worse, with the market now seeing a year-end rate of 31.8%, which is higher than the central bank’s own target. This aligns with the latest official data from September 2025, which showed consumer prices rising at an annual pace of 35%, undermining official forecasts. We’ve seen this happen before, where optimistic government projections are consistently revised upwards as reality sets in.
Despite rising prices, the market expects the Central Bank of Turkey (CBT) to cut its policy rate to 39.0% at its meeting this week. This means real interest rates will become even more negative, offering no incentive to hold the lira. Consequently, derivative traders should consider positions that benefit from further lira weakness, such as buying USD/TRY call options or using forwards to short the currency.
Unconventional Monetary Strategy
This policy of cutting rates into high inflation is a return to the unconventional strategies that failed prior to the brief policy normalization we saw starting in mid-2023. The lira is already depreciating at a 40% annualized rate, and with the exchange rate now approaching 60 per dollar, this trend is likely to accelerate. Given the high level of uncertainty and potential for sharp moves, traders should also look at buying volatility through instruments like options straddles on the lira.
We believe these rate cuts are driven more by political pressure than by economic data, suggesting the CBT’s independence is once again limited. If inflation gets worse, the bank will likely avoid rate hikes and instead use other tools, such as new regulations on credit or foreign exchange, which can be unpredictable. This creates a poor fundamental outlook for the lira, reinforcing the case for bearish bets against the currency in the coming weeks.
