Insights 
VT 
Factors Contributing to Inflation
The central bank’s rate cuts are viewed as politically motivated rather than addressing inflation effectively. Despite the unexpected inflation figures, it is unlikely that the central bank will halt rate reductions. While political pressure is less overt, the economic policy team might see the current policy as unsustainable. There is a possibility that the pace of rate cuts may slow from 250 basis points to 100-150 basis points, but comprehensive economic slowing measures are lacking. The central bank might turn to secondary policy tools, which may not control inflation effectively, leading to potential increased volatility for the lira.
Impact on Currency And Strategy
The latest inflation data for September 2025 has confirmed the trend we have been watching, with year-on-year CPI registering a staggering 65.2%. This re-acceleration shows that the one-off factors we saw impacting prices back in 2023 and 2024 were symptoms of a deeper, more persistent issue. The core inflation components are driving this rise, signaling that price pressures are now firmly embedded in the economy.
This development is no surprise, as we have watched the central bank continue its politically motivated easing cycle over the past year. Since late 2024, the CBT has cut its policy rate by another 1,500 basis points to its current 25%, even as inflation moved from 40% to over 60%. This follows the exact pattern we suspected, where the “conventional policy experiment” was abandoned due to a lack of patience from policymakers.
With inflation at 65% and interest rates at 25%, Turkey’s deeply negative real yield makes holding the lira unattractive. The currency reflects this reality, with the USD/TRY exchange rate now consistently trading above the 48.00 level. This predictable depreciation, which has run at an annualized rate near 40% for over two years, shows no signs of abating.
For traders, this environment suggests positioning for continued lira weakness and heightened volatility in the coming weeks. The CBT has shown it will not reverse its course of rate cuts, meaning the primary driver of lira depreciation remains firmly in place. Any attempt to use secondary policy tools, as we saw fail in the 2021-2022 period, will likely prove ineffective once again.
Therefore, buying USD/TRY call options or outright TRY put options remains a prudent strategy to profit from the expected continued decline. One-month implied volatility is already elevated, hovering around 35%, but the political certainty of the central bank’s path suggests there is still value in these positions. We anticipate that any minor lira rallies will be short-lived and should be seen as opportunities to enter new short positions.
