Turkish Monetary Policy and Inflation Deterrence: Navigating CBRT Credibility and FX Strategy for Foreign Investors

The Central Bank of the Republic of Turkey (CBRT) has been waging a high-stakes battle to stabilize the Turkish lira and curb inflation in 2025, deploying a mix of aggressive FX interventions, macroprudential measures, and inflation-targeting strategies. For foreign investors, the question isn't just whether these policies will work—it's whether the CBRT can rebuild its credibility in a market battered by years of volatility and political uncertainty.

FX Interventions: A Double-Edged Sword

In March 2025, the CBRT sold $25 billion in foreign currency reserves—$10 billion in a single day—to counter lira depreciation triggered by the arrest of Istanbul Mayor Ekrem ImamogluCentral bank chief stands firm on 24% inflation target^[2]. Governor Fatih Karahan defended these moves as necessary to address “high FX demand and low supply,” aiming to restore market confidenceTurkish Central Bank Chief Defends Interventions to Bolster Lira^[5]. While such interventions temporarily stabilized the lira, they also exposed the CBRT's reliance on liquidity injections rather than structural reforms.

The CBRT's toolkit expanded in 2025 with measures like increasing reserve requirements for foreign currency deposits and extending the FX conversion obligation for exporters until July 2025CBRT announces measures to support TL, economists react^[3]. A 3% incentive for converting foreign earnings to lira was added to nudge domestic currency usage. These steps reflect a broader strategy to reduce dollarization, but critics argue they risk stifling private sector flexibility.

Inflation Targets: Progress, But Trust Remains Fragile

The CBRT's 24% inflation target for 2025Central bank chief stands firm on 24% inflation target^[2] has seen partial success, with inflation dropping from 75.5% in May 2024 to 35.05% by June 2025Central bank chief stands firm on 24% inflation target^[2]. This decline has allowed the CBRT to cut the policy rate by 300 basis points in July 2025, bringing it to 43%Central bank chief stands firm on 24% inflation target^[2]. However, the central bank's credibility remains under scrutiny. Goldman Sachs has warned that the CBRT's FX strategy could deter carry trade inflows, as a weaker lira increases risks for foreign investorsCentral bank chief stands firm on 24% inflation target^[2].

The CBRT's Second Inflation Report reaffirmed its 24% target for 2025 and 12% for 2026Central bank chief stands firm on 24% inflation target^[2], signaling a long-term commitment to price stability. Yet, as Bloomberg notes, structural challenges—such as fiscal imbalances and political tensions—loom largeTurkish Central Bank Chief Defends Interventions to Bolster Lira^[5]. Foreign investors, still wary of Turkey's economic volatility, have shown reluctance to commit capital despite these effortsForeign investors wary of Turkey despite $25bn lira intervention^[6].

Credibility and Foreign Investment: A Delicate Balancing Act

Central bank credibility isn't just about numbers—it's about trust. The CBRT's decision to terminate the foreign exchange-protected Turkish lira deposit scheme (KKM) in 2025Turkish central bank plans to terminate FX protected scheme in 2025^[4] was a symbolic step toward simplifying its policy framework. By reducing KKM accounts from $34.2 billion in December 2024 to near-zero, the CBRT aimed to normalize lira usage and reduce reliance on FX-protected instrumentsCBRT announces measures to support TL, economists react^[3].

However, global trends complicate this narrative. As the Trump administration's “America First Investment Policy” tightens outbound investment in sectors like biotechnology and aerospaceCentral bank chief stands firm on 24% inflation target^[2], foreign investors are increasingly prioritizing geopolitical alignment and institutional transparency. Turkey's alignment with these trends—and the CBRT's ability to maintain a floating exchange rate regime—will be critical in attracting capitalTurkish central bank plans to terminate FX protected scheme in 2025^[4].

The Bottom Line for Investors

For foreign investors, the CBRT's 2025 policies present a mixed bag. On one hand, inflation is trending downward, and FX reserves have risen to $153.1 billionCentral bank chief stands firm on 24% inflation target^[2], offering some stability. On the other, structural risks—political instability, carry trade vulnerabilities, and lingering doubts about CBRT independence—remain.

The key takeaway? The CBRT's credibility hinges on its ability to balance short-term interventions with long-term reforms. Investors should monitor two metrics: the lira's resilience against speculative pressure and the CBRT's adherence to its inflation targets. If the central bank can maintain transparency and avoid political interference, Turkey's market could offer high-risk, high-reward opportunities. But for now, caution is warranted.