The Central Bank of Turkey’s latest survey shows rising inflation expectations, reaching 31.8% for the end of 2025, up from 29.9% in the previous survey. This figure exceeds the bank’s forecast ceiling of 29.0%. Minister Mehmet Simsek predicts a 30% inflation rate by the end of this year, partly due to external factors, such as frost impacting food prices. Market estimates for future inflation have also increased. Predictions for 12 months ahead are at 23.3%, while 24-month forecasts stand at 17.4%. These changes indicate that initially optimistic projections are rising as deadlines approach. Despite inflation pressures, the Central Bank of Turkey is expected to cut interest rates from the current 39.0% down to 37.7% by December.

The Lira and Inflation Pressure

The lira is rapidly depreciating, at an annualized rate of 40% against a mix of USD and EUR, further mounting inflation pressure. Rate cuts are viewed as essential due to possible policy restrictions. This may lead to secondary measures becoming more important if inflation rises. The lira’s fundamentals appear weak, suggesting potential instability in the currency market. Inflation expectations are worsening, with the market predicting a year-end rate of 31.8%, surpassing the central bank’s target. This is consistent with official data from September 2025, which indicate that consumer prices have risen at an annual rate of 35%, undermining official projections. We’ve seen this pattern before, where government forecasts are often revised upward as reality takes hold. Even with rising prices, the market expects the Central Bank of Turkey (CBT) to cut its policy rate to 39.0% during its upcoming meeting. This would result in even more negative real interest rates, providing little incentive to hold the lira. Therefore, traders dealing in derivatives might benefit from positions that profit from continued lira weakness, such as purchasing USD/TRY call options or using forwards to bet against the currency.

Unconventional Monetary Strategy

Cutting rates while inflation is high marks a return to unconventional strategies that previously failed before the brief period of normalization starting in mid-2023. With the exchange rate nearing 60 per dollar, the lira is already depreciating at a 40% annual rate, and this trend may speed up. Given the high level of uncertainty, traders should consider buying volatility with options straddles on the lira. We believe these rate cuts are influenced more by political pressure than by economic data, indicating that the CBT’s independence is once again compromised. If inflation worsens, the bank will likely avoid raising rates and might instead resort to measures like new regulations on credit or foreign exchange, which can be unpredictable. This creates a negative outlook for the lira, reinforcing the case for bearish bets against the currency in the upcoming weeks. Create your live VT Markets account and start trading now.

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