Turkey’s central bank kept its inflation targets the same: 16% for 2025 and 9% for 2026. It also added an 8% target for 2028. It said these interim targets will change only in extraordinary situations. The bank raised its 2025 forecast range to 15–21%, with a 19% mid-point. This is up from 13–19% before. For 2026, it set a 6–12% range with a 9% mid-point. A market survey, however, puts 2026 expectations at 23.23%. The bank linked the revision to methodology changes that increased the services weight in the CPI basket. It said this adds about 1 percentage point to the annual projection. Oil and energy assumptions were lowered, with oil now at US$60.9 (down from US$62.4). An ING forecast is US$56.5. The bank also raised its TRY-denominated import price assumptions because non-energy commodity prices are higher. It said January food prices pushed annual inflation toward the upper band. It also warned of more food-driven pressure in February, linked to Ramadan. It said median inflation is still moderate and expects non-food inflation to slow after January. For March and April, it expects underlying inflation to move back toward the levels seen in November and December. The central bank’s signal that it plans to keep cutting interest rates—even while it raised its own 2026 inflation forecast to a 19% midpoint—is an important development for us. The bank’s forecast is still much more optimistic than the market consensus of 23.23%, which may rise further. This widening gap between the bank’s view and market expectations suggests ongoing pressure on the Turkish lira. Because the bank is still leaning toward easing while inflation remains high, we should position for a higher USD/TRY exchange rate in the coming weeks. January inflation data supports this view: inflation rose 6.8% month on month, pushing the annual rate above 71%. This makes the bank’s policy stance look harder to sustain. We see value in buying USD/TRY call options or futures to benefit from expected lira depreciation from current levels. The bank’s warning about a possible February inflation spike from food prices ahead of Ramadan adds more uncertainty. We saw similar pre-Ramadan price increases last year, which suggests this is a recurring and high-impact risk. With uncertainty elevated, buying volatility on USD/TRY looks attractive, since it can profit from a large move in either direction. Even though official guidance points to rate cuts, deeply negative real interest rates make this path difficult. The policy rate is far below the 71% inflation rate. One potential approach is to use interest rate swaps to express the view that the bank will not be able to cut rates as much as it wants without triggering a currency crisis. This can also serve as a hedge in case the bank is forced to reverse policy later in the year.

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