Turkish Equities: Navigating Volatility Amid Central Bank Policy Uncertainty and Political Risks

The Turkish equity market has entered a period of heightened volatility in 2025, driven by a complex interplay of central bank policy uncertainty and domestic political risks. While the Central Bank of the Republic of Türkiye (CBRT) has signaled a cautious easing cycle to combat inflation, its forward guidance remains ambiguous, creating a tug-of-war between disinflationary goals and growth-oriented stimulus. Simultaneously, political turbulence—marked by court rulings, arrests of opposition figures, and institutional clashes—has further destabilized investor sentiment. This dual challenge has left Turkish equities exposed to sharp swings, with the BIST 100 index recording a 4.04% monthly decline in October 2025 alone, according to FinancialContent.

Central Bank Policy: A Delicate Balancing Act

The CBRT's 2025 strategy reflects a tightrope walk between inflation control and economic growth. In July, the bank cut its one-week repo rate by 300 basis points to 43%, followed by a further 250-basis-point reduction to 40.5% in September, according to a TCMB press release. These cuts, while aimed at stimulating growth, have been accompanied by persistent inflation—annual inflation stood at 33.52% in July 2025, far above the 24% year-end target, noted Türkiye Today. The CBRT's "meeting-based" approach to rate adjustments, tied to evolving inflation expectations, has introduced uncertainty. For instance, the bank's September decision to lower rates despite lingering inflationary pressures in sectors like transport and clothing has raised questions about its commitment to price stability, as reported by Economy Middle East.

This ambiguity is compounded by the CBRT's unconventional tools. In March 2025, it suspended one-week repo auctions and introduced lira-settled foreign exchange forward contracts to stabilize the currency, which had depreciated to 41.58 per dollar, according to Türkiye Today. While these measures temporarily eased liquidity concerns, they also signaled a departure from traditional monetary policy frameworks, complicating market expectations. As a result, investors remain wary of sudden policy pivots, particularly as the CBRT's medium-term goal of reaching 5% inflation appears distant.

Political Risks: A Catalyst for Market Turbulence

Political developments have exacerbated the CBRT's challenges. In March 2025, the arrest of Istanbul Mayor Ekrem İmamoğlu triggered an 8.7% single-day plunge in the BIST 100—the largest decline since 2021—and a 12.7% drop in the lira, reported by CTOL Digital. This event underscored the market's sensitivity to institutional instability, as protests and legal battles eroded confidence in governance. Similarly, a September 2025 court ruling that removed leadership from the Republican People's Party (CHP) in Istanbul triggered a 1.53% drop in the BIST 100 on October 13 and a 2.02% decline on October 3, as reported by Reuters.

The cumulative effect of such events has been a flight of capital from Turkish assets. A Reuters report on the European Bank for Reconstruction and Development (EBRD) found that political tensions and volatile investor sentiment are now key risks to Turkey's 2025 growth outlook, despite a revised forecast of 3.5% GDP expansion. The banking sector, in particular, has borne the brunt of this instability, with the Borsa Istanbul Bank Index falling 19% in a single week following the March 2025 crisis, according to MNI Markets.

The Interplay of Policy and Politics: A Path Forward?

The CBRT's efforts to anchor inflation expectations are further complicated by the political environment. For example, the bank's September 2025 rate cut was partly motivated by a desire to offset the economic fallout from political instability, yet this move has been criticized for potentially undermining disinflationary momentum, as highlighted by Yahoo Finance. Meanwhile, fiscal policy coordination—crucial for reinforcing the CBRT's efforts—remains elusive, as political gridlock delays structural reforms.

Investors navigating this landscape must contend with a high degree of uncertainty. While the CBRT's forward guidance suggests a gradual easing path, the risk of abrupt policy tightening in response to inflation spikes cannot be discounted. Similarly, political developments—such as upcoming court rulings or shifts in leadership—could trigger sudden market corrections. As noted by BlackRock, low-volatility strategies and defensive equity allocations are increasingly prudent in such an environment.

Conclusion

Turkish equities remain a high-risk, high-reward proposition in 2025. The CBRT's dual mandate of curbing inflation and supporting growth has created a policy environment rife with uncertainty, while political instability continues to amplify market volatility. For investors, the path forward requires a nuanced understanding of these dynamics and a readiness to adapt to rapidly shifting conditions. As the year progresses, the interplay between monetary policy and political developments will likely remain the defining factor in Turkey's equity market trajectory.