Turkey’s central bank is anticipated to implement a 150 basis point rate cut at the current Monetary Policy Committee meeting. This follows the easing trend, with markets watching for signals indicating if this pace could continue.
A lower-than-expected December CPI, driven by non-food items, alongside record-high reserves, supports the 150bp cut to 36.5%. However, there is a chance of a lower 100bp adjustment due to strengthening food pricing pressures and indications of domestic demand recovery.
Market Expectations
The market expects a 27% rate by year-end, but current pricing is around 30.25-30.50%. More aggressive pricing could occur if the central bank provides clearer signals or inflation declines unexpectedly.
The Turkish lira remains robust, maintaining its appeal as a carry trade in emerging markets. The market’s confidence is reflected in growing long positions in TRY, which have reached an estimated USD50 billion, surpassing last year’s levels.
We can now see that the aggressive 150 basis point rate cut early last year was the start of a major easing cycle. At the time, we anticipated the policy rate would fall significantly, creating a compelling carry trade opportunity. This outlook was supported by what were then record-high foreign exchange reserves.
Throughout 2025, the central bank was indeed aggressive, cutting the policy rate to 25% by year-end, even lower than the 27% we initially projected. While annual inflation fell from over 60% to just under 20% by December 2025, the lira did see managed depreciation against the dollar. However, the high yield more than compensated for the currency’s slow decline, making the long TRY position profitable for most of last year.
Trading Strategies
Given the central bank is now pausing, the straightforward carry trade has become more crowded and less certain. Traders should now consider using derivative strategies, such as selling out-of-the-money TRY puts, to collect premium while defining risk. This takes advantage of the view that authorities will prevent sharp, sudden depreciations, especially with foreign reserves still strong at around $140 billion.
The key focus in the coming weeks will be the upcoming January inflation data. A higher-than-expected print could force the central bank to signal a longer pause, potentially squeezing crowded long-lira positions and causing a spike in short-term volatility. Forward contracts are now pricing in a much slower pace of depreciation for 2026, but this view is highly dependent on inflation remaining on a downward path.
