IMF 'urges' Turkey to avoid repeating large minimum wage hike

Reuters

Turkey should avoid a repeat of its last inflation-fuelling minimum wage hike when the next raise is due on Jan. 1 and focus on support measures for the poorest part of the population instead, the International Monetary Fund's (IMF) mission chief for the country told Reuters.

Jim Walsh, speaking on the sidelines of the IMF World Bank annual meeting in Washington, 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," said Walsh.

"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%.

Turkey's central bank held rates in October 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 the bank 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 IMF expects inflation to stand at 24% by the end of next year - broadly in line with a Reuters poll that predicted inflation would fall to 25% by then.

Turkey's central bank is expected to wait until December or January to cut interest rates, according to a Reuters poll this month, as economists abandoned predictions of an earlier move. It is forecast to cut rates by 20 points to 30% by end-2025.

A mix of unanchored inflation expectations and large energy import needs made Turkey 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 Turkey 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."