Turkey's Minimum Wage and Inflation Considerations

By Karin Strohecker

WASHINGTON (Reuters) – Turkey should avoid repeating its last inflation-boosting minimum wage hike when the next adjustment is due on January 1, focusing instead on support for the poorest, according to the IMF's mission chief for Turkey, Jim Walsh, at the IMF World Bank annual meeting in Washington.

Walsh noted that discussing interest rate cuts is "probably premature" since inflation remains significantly above 2%. Ankara is expected to announce the minimum wage increase in December, following a 49% hike in January that spurred inflation sharply in the first quarter. "Wage-setting at a national level can anchor inflation expectations," Walsh explained, urging the government to consider social programs that assist low-income households through cash transfers or targeted government support.

Market forecasts predict a 25% minimum wage increase for January. Inflation rose sharply after the previous hike, peaking at 75% in May, and has since eased to 49.4% in September, dipping below the benchmark interest rate of 50%.

The Central Bank of Turkey held rates in October, indicating potential for future rate hikes to meet an inflation target of 14% by the end of 2025. Walsh advised strengthening communication from the central bank, emphasizing the necessity for more rate increases if they aim to achieve this target amid speculative discussions about lowering rates.

When inflation remains at 2.5% per month, Walsh cautioned that talks of cuts are untimely. The IMF projects inflation to drop to 24% by next year, aligning with a Reuters poll predicting a decrease to 25% by then. Economists now expect the central bank to wait until December or January to cut rates, with forecasts suggesting a reduction of 20 points to 30% by the end of 2025.

Walsh highlighted that Turkey's unanchored inflation expectations and high energy import needs could amplify inflation risks, recommending an increase in renewable energy production. Additionally, the IMF encourages Turkey to continue reducing costly energy subsidies while protecting vulnerable households from adverse effects.

"The sooner you do it, the more money you save from reforming the subsidies," he stated.