Türkiye should avoid repeating the inflation-driving minimum wage hike when the next increase is scheduled for Jan. 1, the International Monetary Fund’s (IMF) mission chief for the country said on Wednesday.
Instead, Jim Walsh suggested focusing on support measures targeted at the poorest segments of the population.
Speaking on the sidelines of the IMF World Bank annual meeting in Washington, Walsh also said talk of interest rate cuts was “probably premature,” given that sequential inflation was still running well above 2%.
Ankara is expected to announce in December by how much it will raise the minimum wage at the start of 2025 after delivering a 49% hike in January of this year, which pushed inflation sharply higher in the first quarter.
“We would hope that doesn’t happen this year, because we know from experience in many countries with high inflation that wage-setting like this at a national level is a big anchor for inflation expectations,” Walsh told Reuters.
“There’s a trade-off that the authorities have to make and they’re quite aware of it.”
Instead, Ankara should focus on developing social programs that will provide support for low-income households through cash transfers or through better-targeting government support to help bolster the income of workers on lower wages, Walsh said.
Market expectations for the January minimum wage hike stand at around 25%, according to bankers.
Inflation climbed sharply in the wake of the last hike, hitting a peak of 75% in May, but has been slowing since and fell to 49.4% in September – dipping for the first time in the current cycle below the benchmark interest rate of 50%.
Türkiye’s central bank held rates in October for the seventh straight month and warned a bump in recent inflation data lifted uncertainty, a hawkish signal that could reinforce views that policy easing will not begin until next year.
While financial conditions had already tightened, Walsh said the central bank should further strengthen its communication and that more rate hikes may be necessary if it really wanted to hit its inflation target of 14% by year-end 2025.
“The central bank has often sounded hawkish, and they say that they will keep rates where they are until they see that sequential inflation is on a downward trend,” said Walsh.
However, markets were still ripe with speculation about when the central bank would begin to lower rates, he said.
“When sequential inflation is still running at 2.5% a month, talk of cutting is probably premature.”
The government forecasts the annual inflation will fall to 41.5% in 2024 and 17.5% next year. The country’s central bank sees it dropping to 38% at the end of this year.
The IMF sees it standing at 24% by the end of next year.
The central bank is expected to wait until December or January to cut interest rates, according to the latest surveys, as economists abandoned predictions of an earlier move. It is forecasted to cut rates by 20 points to 30% by the end of 2025.
A mix of unanchored inflation expectations and large energy import needs made Türkiye more vulnerable to a quicker and broader feed-through to inflation from possible energy shocks, Walsh said, adding the country could counter that by ramping up renewable energy production.
The IMF would also encourage Türkiye to push ahead with further reducing costly energy subsidies, Walsh said, while buffeting poorer households against the fallout.
“The sooner you do it, the more money you save from reforming the subsidies.”
