There are risks related to the ongoing interest rate cuts by the Turkish central bank as inflation expectations rise again. Households are increasingly worried about inflation, with the 12-month forward expectation reaching 54.4% in October. This change is mainly due to rising administrative prices and continued increases in food prices. Many households doubt that inflation will drop to target levels.

Political Uncertainty in Turkey

Political uncertainty has surfaced, especially after the Nationalist Movement Party (MHP) unexpectedly boycotted a Presidential reception, indicating tension within the coalition. Differences between President Erdogan and MHP leader Bahceli regarding the peace process and Cyprus elections raise concerns about unity. By the end of August, the net open foreign exchange position of non-financial companies widened by 1.6% to $184.9 billion, showing a faster growth in liabilities. Despite what officials claim, Turkey’s net foreign exchange reserves are down to $12 billion and are falling. Claims of high reserves often refer to total international figures that include gold, which simply reflects the increased value of gold. The situation for the lira exchange rate is not improving, as political instability and market volatility hinder the central bank’s efforts. The central bank’s early easing actions, amid rising inflation risks, could reduce the appeal of Turkish lira deposits and increase demand for foreign currency. The underlying risks for the Turkish lira are resurfacing, reminiscent of past challenges. Household inflation expectations have risen again, with recent data showing them at 59.8%. This increase follows the alarming official CPI figure for September 2025, recorded at 68.5% year-over-year, highlighting a persistent lack of confidence in price stability.

Central Bank Credibility Issues

The recent actions of the central bank have not helped build its credibility or support the lira. By introducing a smaller-than-expected interest rate hike of just 100 basis points, the central bank has made lira deposits less attractive, especially since real returns are still significantly negative. This feels similar to previous premature easing cycles, which led to greater demand for foreign currency. For derivative traders, this situation suggests a high likelihood of increased market volatility in the weeks ahead. The gap between ongoing high inflation and the central bank’s cautious monetary policy creates opportunities for long volatility strategies. Buying USD/TRY call options or TRY put options may offer a favorable risk-reward profile, capitalizing on potential sharp declines in the lira. The fundamental indicators also support a bearish outlook, as conditions have not improved substantially. The latest central bank data from mid-October 2025 shows net international reserves—a critical measure of the bank’s ability to support the currency—have dropped to just $9.5 billion. This puts the lira in a vulnerable position, unable to defend against changes in market sentiment due to limited intervention capacity. Political instability is again contributing to market uncertainty, similar to the coalition tensions experienced in previous years. Current public disputes between coalition partners over the 2026 budget are raising fears about policy coordination and fiscal discipline. Any increase in these tensions could trigger a new wave of lira depreciation. Given this context, preparing for further lira weakness seems like the most sensible approach. Traders might consider using derivative tools to bet against the lira, as the combination of high inflation, ineffective policy responses, and low reserves indicates a continuing downward trend for the currency. The path of least resistance for USD/TRY is upwards. Create your live VT Markets account and start trading now.

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