Turkey’s consumer price index rose by 1.94% month on month in March. This was below the forecast of 2.32%.
The March figure indicates a lower monthly increase in consumer prices than expected. The data compares an actual rise of 1.94% against a 2.32% forecast.
Inflation Surprise Supports Lira Stability
This lower-than-expected inflation figure is the first clear sign that the central bank’s aggressive policies are taking hold. We see this as a reason to reduce bets on extreme Turkish Lira weakness in the near term. Implied volatility on USD/TRY options should decrease, making it more attractive to sell out-of-the-money call options.
The market has been pricing in a possibility of at least one more interest rate hike this year, but this data significantly lowers that chance. We believe traders should consider entering positions that benefit from stable or falling short-term rates. This includes receiving fixed payments on Turkish Lira interest rate swaps for tenors under one year.
This development is positive for Turkish equities, which benefit from a more stable currency and the prospect of an earlier end to the rate-hiking cycle. We should look at buying call options on the BIST 100 banking index. Banks are highly sensitive to interest rate expectations and improved sovereign credit risk.
We are now seeing concrete results from the orthodox policies implemented over the past two years. Looking back at 2025, we remember the policy rate being held steady at 50% to build credibility, and now we see it working. This improved sentiment is reflected in Turkey’s 5-year credit default swaps, which recently fell below 280 basis points.
Risks Remain Despite Progress
However, we must remember that annual inflation is still running at 67.4%, so the fight is far from over. This single data point is encouraging, but the central bank will need to see several more months of cooling prices before signaling any policy pivot. Therefore, any long Lira or long equity positions should be structured with defined risk.
