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Turkey’s minimum wage hike may elevate inflation further

Nature, Outdoors, Plant Thomson Reuters/STRINGER
Economists said the wage hike was set to cause a medium-term deterioration in the outlook for inflation

Turkey’s larger-than-expected minimum wage hike, which impacts some seven million workers, is expected to push already elevated inflation even higher in the coming months, economists and sector officials said.

Labour Minister Vedat Isikhan said on Wednesday the monthly minimum wage will be TL17,002 ($578) in 2024, a 49 percent increase from the level determined in July and a 100 percent hike from January.

Economists said the wage hike was set to cause a medium-term deterioration in the outlook for inflation, which was already expected to hit around 70-75 percent in the first half of 2024.

“A two-step increase in the minimum wage would have been better both for employees and employers and would not cause a sudden spike in inflation. Prices will increase by at least 25-30 percent. This will be reflected in retail prices,” said Berke Icten, the head of Turkey’s Shoes Manufacturers Association.

The minimum wage is usually revised once a year but due to high inflation and a depreciating currency, the government raised it every six months in the last two years.

Sector officials said the support provided to employers to ease the cost impact of the minimum wage hike on production was less than expected and would strain businesses.

The central bank said in the minutes of last week’s monetary policy committee meeting that monthly inflation would rise in January, particularly due to the increase in minimum wage, but it is expected to slow in February and beyond.

The central bank has raised its policy rate by 3,400 basis points since June and said it is committed to reining in inflation, which stood at 62 percent in November.

An economist who spoke on condition of anonymity said the large minimum wage hike caused the market to question the government’s commitment to the disinflation program.

“A 40 percent to 50 percent increase in the minimum wage was expected, but the increase was at the upper limit. It is not possible to give a clear figure, but we are talking about a level that may have a significant impact on inflation,” the economist said.

“This increase will distort the medium-term outlook for inflation. Since inflation will hit 70 percent in H1, if there is no other increase in the middle of the year, wages will be decreasing in real terms.”

According to the median of a Reuters poll, inflation is seen falling to around 43 percent by the end of next year, declining slowly despite the tight monetary policy.