Dec 26 2024: Expectations for a rate cut by Turkey’s central bank surged on Wednesday following a moderate 30% increase in the minimum wage. Economists viewed this as a signal of the government’s commitment to disinflation goals, despite the potential inflationary pressures from the wage adjustment.
The net monthly minimum wage will rise to 22,104 Turkish lira ($627) in 2025. The government described the hike as a balance between maintaining fiscal discipline and combating inflation. This increment, however, fell short of the approximately 70% increase sought by workers’ unions, affecting nearly 9 million workers.
Economists Signal Likely Policy Easing
The minimum wage decision has intensified expectations of monetary easing, with many analysts predicting the central bank will reduce interest rates in its upcoming meeting.
- Filiz Eryılmaz, chief economist at ALB Yatırım, revised her forecast from a 150-basis-point cut to 200 basis points, adding that a 250-basis-point reduction would not be surprising.
- A Reuters poll last week projected the central bank would begin an easing cycle after eight months of steady rates, with expectations for a rate cut ranging between 150 and 250 basis points from the current 50%.
“This wage increase, being at the lower end of expectations, is expected to have a limited additional impact on CPI, likely less than 1 percentage point. This has given the central bank room to initiate interest rate cuts,” said Haluk Burumcekci, founding partner at Burumcekci Consulting.
Impact on Inflation
According to the central bank’s research, each 1% rise in the minimum wage typically contributes 0.06 to 0.2 percentage points to inflation. Economists estimate the new wage hike could add 1.8 to 6 percentage points to inflation but note this is already reflected in the year-end inflation forecast of 21%.
Turkey’s annual inflation eased to 47.09% in November, a significant drop from its 75% peak in May. However, progress has been slower than anticipated, suggesting room for further monetary policy adjustments.
Policy Decision Awaited
The central bank is set to announce its policy rate decision at 1100 GMT on Thursday. Markets and analysts will be closely watching for signs of a shift in monetary policy.
($1 = 35.2599 lira)
