The Turkish central bank has updated its inflation forecast for the end of 2025 to 31%-33%, up from the previous estimate of 25%-29%. This change aligns with the general consensus, while the forecast for 2026 remains unchanged at 13%-19%. Governor Fatih Karahan mentioned several reasons for this revision, including drought, capital flows, geopolitical issues, and persistent service prices. Although inflation is currently higher than expected due to food prices, a broader trend towards lower inflation is anticipated.

Inflation Trends and Projections

Finance Minister Mehmet Simsek highlighted a drop in overall Consumer Price Index (CPI) inflation, with the annual rate for October at 32.9%. The ministry expects further reductions in inflation thanks to strict monetary policy, responsible fiscal measures, careful pricing, and supply-side improvements. However, there are ongoing concerns about how quickly inflation will decrease. The central bank often updates its near-term forecasts to reflect reality while keeping long-term targets overly optimistic. Factors such as political instability and market fluctuations make monetary policy challenging. Easing monetary policy during rising inflation could hurt the Turkish lira’s value against foreign currencies. The central bank’s increase in the 2025 inflation forecast to 31%-33% signals their awareness of reality. This trend shows a pattern where short-term estimates are revised upward while long-term targets remain unrealistic. The continuous gap between projections and actual outcomes makes it hard to trust claims of decreasing inflation. Officials point to the October annual inflation rate of 32.9% as evidence of improvement, but this is misleading. The drop largely results from last year’s extremely high inflation, which peaked above 70%. The key issue is the recent monthly price increase; with a monthly CPI still at around 2.8% in October 2025, there’s no viable way to reach single-digit inflation.

Currency Implications and Strategies

Persistent underlying inflation reduces the appeal of investing in the Turkish lira. The threat of currency depreciation due to high inflation and possible political pressure for early interest rate cuts outweighs any gained yield. Data from early November 2025 shows that many locals are increasing their foreign currency deposits, reflecting continued lack of confidence in the lira. Given this situation, we should be prepared for ongoing weakness and volatility in the lira in the coming weeks. Strategies could involve buying USD/TRY call options or non-deliverable forwards (NDFs) to bet on a stronger dollar. The large gap between official assertions and actual conditions suggests option volatility may be underestimated, making long volatility positions appealing. We should remain cautious about claims of solid fiscal policy, especially after significant budget increases since the 2023 elections. Any indication that the central bank may yield to pressure and loosen monetary policy before controlling inflation could lead to rapid lira depreciation. Consequently, any long-lira investments carry significant risks. Create your live VT Markets account and start trading now.

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