Introduction to Carry Trade in Turkish Lira
Carry trade inflows into Turkish lira assets have exceeded $45.5 billion by the end of September. This is driven by the highest real return among emerging-market currencies when adjusted for expected inflation over the next 12 months, according to U.S.-based investment bank Morgan Stanley.
What is Carry Trade?
Carry trade refers to investments where traders borrow in low-yielding currencies to buy higher-yielding assets. In this case, the Turkish lira offers the highest real return based on expected inflation over the next 12 months, sustaining continued foreign carry trade inflows. The bank highlighted that Türkiye leads all major emerging markets in real rates at around 18%, according to its 12-month ahead inflation-adjusted calculation, followed by Brazil and Egypt.
Inflation Outlook in Türkiye
Morgan Stanley raised its year-end inflation forecast for Türkiye from 30% to 31.5% following September’s higher-than-expected inflation data. This signals a slower pace of disinflation. Analysts noted that the latest data indicated "a more gradual slowdown in disinflation momentum," prompting the revision. They maintained their 2026 year-end inflation projection at 26%, far above the Turkish central bank’s interim target of 16%.
Factors Contributing to Inflation
Food inflation was the largest contributor to consumer price increases in September, rising 4.6% month-on-month and 36% year-on-year. This is driven by tighter supply conditions following large-scale weather disasters that caused extensive crop losses. However, analysts expect that food supply conditions will normalize next year, helping to ease price pressures in the fourth quarter of 2026.
Monetary Policy Expectations
The report also suggested that the Turkish central bank may adopt a more cautious approach to monetary easing. Morgan Stanley revised its earlier projection of a 200-basis-point rate cut in October to 150 basis points, reflecting a likely moderation in the pace of easing. It expects the policy rate—currently at 40.5%—to fall to 37.5% by the end of 2025 and 26.5% by the end of 2026.
Conclusion
In conclusion, the carry trade in Turkish lira has topped $45.5 billion, driven by the highest real return among emerging-market currencies. The inflation outlook in Türkiye has been revised upward, and the central bank is expected to adopt a more cautious approach to monetary easing. As the Turkish economy continues to evolve, it will be important to monitor the carry trade and inflation outlook to understand the potential implications for investors and the broader economy.
