Turkey's Moderating Inflation: A Risk-On Window for Emerging Market Assets?

The Turkish economy has entered a critical juncture in its inflationary trajectory. After years of hyperinflationary turbulence, the latest data from the Turkish Statistical Institute (TUIK) reveals a sustained decline in the Consumer Price Index (CPI) to 33.52% year-over-year in July 2025, down from 35.05% in June. This marks a significant, if still modest, shift in a country where inflation peaked at 85% in 2022. The Central Bank of the Republic of Türkiye (CBRT) has cut its policy rate by 300 basis points in mid-2025, signaling a pivot toward accommodative monetary policy. But does this moderation in inflation represent a genuine turning point—or a temporary reprieve for investors?

The Inflation Narrative: Structural Shift or Cyclical Relief?

Turkey's CPI decline is underpinned by two key factors: monetary policy normalization and sectoral rebalancing. The CBRT's rate cuts, while unconventional in timing, reflect a recalibration of priorities. The bank now appears to be balancing its dual mandate of inflation control with growth support, a departure from its earlier aggressive tightening in 2023-2024. However, the CBRT's own forecast (24% by year-end) diverges sharply from market expectations (29.75%), highlighting lingering uncertainties.

Sectoral data adds nuance. While core inflation (excluding food and energy) has moderated, housing, transport, and education prices remain stubbornly high. The July CPI report showed a 5.78% monthly rise in housing costs and a 2.89% surge in transport prices. This “services inflation stickiness” mirrors global trends, where labor market tightness and structural bottlenecks persist. For investors, this suggests that while headline inflation is easing, underlying pressures could delay a return to “normalcy.”

Equity and Debt Markets: A Tale of Two Sentiments

The BIST100 index, Turkey's benchmark equity index, has shown mixed signals. Historical correlations between the BIST100 and the EUR/TRY exchange rate have shifted post-pandemic—from a negative to a positive relationship—reflecting a recalibration of investor behavior. This shift indicates that Turkish equities are now more sensitive to global risk appetite than to local currency depreciation.

The CBRT's recent policy actions have also influenced local debt markets. Turkish lira deposits surged to 58% of total household deposits in April 2025, up from 50% in early 2024, as rate hikes incentivized savings. However, the CBRT's intervention in foreign exchange markets (e.g., lira-settled forward sales) has introduced volatility. For instance, the April 2025 tariff announcements triggered a spike in the VIX index, temporarily spooking investors.

Risk-On Positioning: A Calculated Bet?

The question for investors is whether Turkey's inflation moderation creates a “window of opportunity” for risk-on positioning. Three factors merit scrutiny:

1. Policy Credibility and Transmission: The CBRT's aggressive rate cuts and liquidity management have stabilized short-term expectations. However, credibility remains fragile. If inflation overshoots the CBRT's 24% target, the central bank may face renewed pressure to reverse course, triggering market jitters.

2. Currency Dynamics: The Turkish lira's performance will hinge on the interplay between domestic policy and external shocks (e.g., U.S. interest rates, global energy prices). A weaker lira could boost exports but exacerbate inflation in the short term.

3. Sectoral Opportunities: While services inflation persists, sectors like manufacturing and technology—supported by the CBRT's easing cycle—could benefit. The government's Medium-Term Program (MTP) for 2024–2026 also highlights incentives for green energy and strategic industries, offering long-term potential.

Data-Driven Insights for Investors

The yield spread between Turkish and U.S. bonds has narrowed, reflecting improved risk perception. However, Turkey's bond market remains volatile, with spreads widening during global risk-off episodes. Investors should monitor the CBRT's inflation forecasts and its ability to manage dollarization risks.

For equities, the BIST100's exposure to global trends (e.g., energy, commodities) adds complexity. A risk-on bet would require a “barbell” strategy: overweighting sectors with strong domestic demand (e.g., construction, utilities) while hedging against currency swings via lira-denominated assets.

Final Verdict: A Window, Not a Guarantee

Turkey's moderating inflation presents a qualified opportunity for risk-on positioning. The CBRT's policy pivot has stabilized short-term expectations, but structural challenges—such as services inflation and current account deficits—remain. Investors should approach with caution, prioritizing liquidity, currency hedging, and sectoral diversification.

In the near term, the BIST100 could outperform if global risk appetite improves and the CBRT's disinflation path holds. However, the window for risk-on bets is narrow and contingent on the central bank's ability to balance growth and inflation. For now, Turkey's asset markets offer a high-risk, high-reward proposition—a gamble worth considering for those with a medium-term horizon and a tolerance for volatility.