Lira Swaps Signal Turkey Will Hold Off Hiking Rates This Meeting

The key read-through is that Turkey’s policy path is becoming a function of external disinflation rather than domestic credibility. If energy holds lower, the central bank gets a short window to preserve optionality; if it hikes anyway, it risks tightening into a fading inflation impulse and amplifying recessionary pressure. That makes the curve vulnerable to a sharper repricing of front-end rate expectations if oil stabilizes lower for another few weeks, but also prone to fast reversal if geopolitics re-heat.

Second-order, a pause helps domestic banks and leveraged balance sheets more than it helps the real economy. Financials and duration-sensitive assets benefit from lower funding-cost expectations, but the lira remains exposed if traders conclude the bank is prioritizing growth over credibility; in EM, that usually shows up first in FX vol and then in local-duration underperformance. The important distinction is that a “no hike” decision is not neutral — it effectively shifts the burden back onto the currency to do some disinflation work.

The market may be underestimating how quickly this can flip if energy reverses. A renewed oil bid would reprice imported inflation within days, while the policy response would lag by one to two meetings, creating a clean setup for higher swaps, weaker lira, and wider local risk premia. The contrarian view is that the current easing in rate expectations may already price in too much benign geopolitics; if the ceasefire proves fragile, the move in front-end swaps has room to unwind violently.