Turkish Lira Rebound Potential Amid Revised Inflation Forecasts

The Turkish lira, long buffeted by volatility, now stands at a pivotal juncture. Recent data and policy shifts suggest a nascent stabilization, fueled by the Central Bank’s unwavering monetary discipline and structural reforms to dismantle inflation-eroding mechanisms like the KKM forex-protected deposit scheme. With inflation forecasts revised downward—despite near-term risks—the stage is set for a strategic re-entry into lira-denominated assets and export-driven sectors.

The Inflation Outlook: From Peak to Pivot

The Central Bank of the Republic of Turkey (CBRT) has defied expectations by driving annual inflation down to 38.1% by March 2025, a sharp drop from its 2023 peak of 72.3%. While the IMF projects a further decline to 18.6% by 2029, market participants now expect year-end 2025 inflation to settle around 30%—a marked improvement from earlier dire forecasts. This revision reflects the CBRT’s dual focus: monetary tightening to curb domestic demand and structural reforms to dismantle inflationary pressures.

The CBRT’s key tools—elevated policy rates, reserve requirements, and loan growth limits—have constrained credit expansion, while the phased exit of the KKM scheme has reduced dollarization risks. With KKM balances collapsing to $34.2 billion (6.2% of total deposits), investors are increasingly favoring lira-denominated instruments like money market funds, which now hold 600 billion lira in assets. This shift underscores a critical turning point: the lira is no longer a liability but a vehicle for yield-seeking capital.

Monetary Policy Persistence: The Cornerstone of Stability

The CBRT’s credibility hinges on its data-dependent, forward-looking approach. Despite global headwinds—U.S. trade protectionism, oil price volatility—it has refused to back down from its 5% inflation target, even as near-term risks loom. For instance, the central bank’s decision to halt KKM renewals in February (as of May 2025) and reduce loan growth limits to 0.5% monthly for foreign currency loans demonstrates its resolve to prioritize price stability over short-term pain.

These measures have already borne fruit. Services inflation, a key driver of Turkey’s high CPI, has slowed to single digits, while producer prices—a leading indicator—hit their lowest annual rate since 2021 (23.5%). The lira’s exchange rate volatility, though still elevated at 18.9%, has stabilized as the CBRT’s floating rate regime reduces the need for costly interventions.

Structural Reforms: The End of the KKM Era

The KKM scheme’s termination is more than a policy tweak; it’s a structural rebalancing of Turkey’s financial system. By eliminating forex-protected deposits, the CBRT has forced investors to price in lira risk transparently, fostering a market-driven currency valuation. The decline of KKM’s share of deposits—from a peak of over 30% to 6.2%—signals the lira’s return to prominence as a store of value.

This shift has created opportunities in lira-denominated bonds and equities. With gross international reserves at $163.5 billion, Turkey’s external position is stronger, reducing the risk of sudden stops. Meanwhile, the export sector—particularly automotive, textiles, and agriculture—stands to benefit from a weaker lira and improving global demand. Turkey’s trade surplus, though modest, has held steady, and its tourism revenue (a lira-friendly sector) rose 17% year-on-year in early 2025.

Fiscal-Monetary Coordination: The Unsung Catalyst

While the CBRT garners headlines, the fiscal authority’s discipline deserves equal credit. The government’s 2025 budget—projecting a primary surplus of 1% of GDP—reduces crowding-out pressures on credit markets. Combined with the CBRT’s reserve management and inflation targeting, this coordination has anchored inflation expectations.

Investors should also note the real estate sector, where reforms like the Citizenship by Investment (CIP) program’s revised terms (shifting from KKM to real estate investments) are attracting capital. While risks remain—geopolitical tensions, energy prices—the 2025 fiscal framework provides a floor against destabilization.

Investment Implications: Act Now, Reap Later

The lira’s rebound is not a sprint but a marathon. For investors, the sweet spot lies in:
1. Lira-denominated bonds: Short-term government paper offers yields of 40%+, with the CBRT’s disinflation path reducing rollover risks.
2. Export-driven equities: Firms like Tofaş (automotive) and Yapı Merkezi (construction materials) benefit from a weaker lira and rising global demand.
3. Money market funds: A liquid alternative to KKM, offering 8-10% monthly returns in a high-yield environment.

Conclusion: The Tide is Turning

Turkey’s journey from hyperinflation to stabilization is far from over, but the CBRT’s monetary persistence and structural reforms have laid the groundwork for a lira rebound. With inflation forecasts now in the low-30s by year-end, and the lira’s role as a credible asset growing, the time to position is now. Risks remain, but for investors willing to look past near-term noise, Turkey offers asymmetric upside—a chance to buy a depreciated currency and economy at a discount.

Act decisively, but with discipline. The lira’s recovery may yet be one of 2025’s most compelling stories.

Data sources: Central Bank of the Republic of Turkey, IMF, WalletInvestor, and market surveys.