**Factors Contributing to Inflation** The central bank’s cuts in interest rates seem more like political moves than effective measures to control inflation. Even with surprising inflation numbers, it is unlikely that the bank will stop lowering rates. While political pressure isn’t obvious, the economic policy team may believe the current approach can’t last. Rate cuts could slow from 250 basis points to 100-150 basis points, but there are no strong measures to slow down the economy. The central bank might need to rely on secondary policies, which likely won’t control inflation well, possibly causing more volatility for the lira. **Impact on Currency and Strategy** The latest inflation numbers for September 2025 confirm our observations, revealing a year-on-year CPI increase of 65.2%. This sharp rise indicates that the price increases we noticed in 2023 and 2024 were signs of a bigger, ongoing problem. Core components of inflation are driving this surge, showing that price pressures are now firmly established in the economy. This situation isn’t surprising. We’ve seen the central bank continue its politically driven rate cuts over the past year. Since late 2024, the CBT has reduced its policy rate by another 1,500 basis points to 25%, even as inflation jumped from 40% to over 60%. This follows the pattern we expected, where the “traditional policy approach” was dropped due to the policymakers’ impatience. With inflation at 65% and interest rates at 25%, Turkey’s negative real yield makes holding the lira unattractive. The currency reflects this, with the USD/TRY exchange rate consistently above 48.00. This predictable depreciation, which has seen an annualized rate near 40% for over two years, shows no signs of stopping. For traders, this environment suggests preparing for ongoing lira weakness and increased volatility in the coming weeks. The CBT has made it clear it won’t stop cutting rates, meaning the main factor driving the lira’s decline remains unchanged. Any attempt to use secondary policies, similar to the failures of 2021-2022, will likely be ineffective again. Thus, buying USD/TRY call options or outright TRY put options is a smart strategy to benefit from the expected ongoing decline. One-month implied volatility is high at around 35%, but the certainty regarding the central bank’s direction indicates there’s still potential in these positions. We expect that any small rallies in the lira will be short-lived and should be viewed as chances to take new short positions. Create your live VT Markets account and start trading now.

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