The Turkish central bank has revised its 2025 year-end inflation forecast to 31%-33%, up from the previous 25%-29%. This adjustment aligns with consensus forecasts, though projections for 2026 remain at 13%-19%.

Governor Fatih Karahan cites factors like drought, capital flows, geopolitical tensions, and sticky service prices for the revision. Despite inflation figures surpassing expectations due to food costs, a broader disinflationary trend is expected to continue.

Inflation Trends and Projections

Finance Minister Mehmet Simsek noted a decrease in headline CPI inflation, with October’s annual rate dropping to 32.9%. The ministry predicts further disinflation due to tight monetary policy, disciplined fiscal measures, prudent tariff pricing, and supply-side actions.

Concerns remain about inflation moderation, as the central bank often revises near-term forecasts to align with reality while maintaining unrealistic future projections. Political fragility and market volatility complicate monetary policy. Continued monetary easing amidst rising inflation risks diminishes the appeal of the Turkish lira compared to foreign currencies.

The central bank’s decision to raise its year-end 2025 inflation forecast to the 31-33% range is a clear signal that they are playing catch-up with reality. We see this as a familiar pattern where near-term projections are reluctantly adjusted upwards while unrealistic long-term targets remain. This persistent gap between official forecasts and actual outcomes should keep us skeptical of any disinflation narrative.

Officials are pointing to the annual inflation rate falling to 32.9% in October as proof of moderation, but this is misleading. This decline is largely a base effect from the sky-high inflation we saw peaking above 70% back in 2024. The crucial figure is the recent monthly price increase; with month-on-month CPI still running hot at around 2.8% in October 2025, there is no credible path to single-digit inflation.

Currency Implications and Strategies

This stubborn underlying inflation undermines the attractiveness of the Turkish Lira carry trade. The risk of currency depreciation from persistently high inflation and potential political pressures for premature rate cuts easily outweighs the yield offered. Data from early November 2025 confirms this, showing a notable increase in foreign currency deposits held by locals, signaling a continued lack of confidence in the Lira.

Given this outlook, we should position for continued Lira weakness and volatility in the coming weeks. Derivative strategies could include buying USD/TRY call options or non-deliverable forwards (NDFs) to bet on a higher exchange rate. The wide discrepancy between official statements and the on-the-ground reality also suggests that option volatility is likely underpriced, making long volatility positions attractive.

We must remain cautious about official claims of a supportive fiscal stance, especially after the significant budget expansions seen following the 2023 elections. Any sign that the central bank might bow to pressure and ease monetary policy before inflation is truly controlled would be a trigger for a much faster depreciation. Therefore, any long-Lira positions should be considered extremely high-risk.

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