FX.co ★ IMF advises Turkey to prioritize targeted support over minimum wage hike

The IMF has offered an intriguing piece of advice to Turkish authorities. According to Jim Walsh, the IMF's mission chief for Turkey, the government should avoid a repeat of its last minimum wage hike, which previously triggered a spike in inflation. It is crucial to prevent negative consequences and remain vigilant.

Instead of raising the minimum wage, Walsh recommends focusing on support measures for the poorest segments of the population. He also believes that it is premature to talk about lowering interest rates as inflation in Turkey is still well above 2%.

Turkish authorities are expected to agree on the size of the minimum wage increase by December, with the new figure set to be announced in early 2025. Notably, the minimum wage was raised by 49% in January 2024, leading to a fresh surge in inflation during 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 said.

Following the recent minimum wage hike, Turkey experienced a sharp rise in inflation, which peaked at 75% in May 2024. However, consumer price growth later slowed, falling to 49.4% in September, below the central bank's benchmark rate of 50%.

To stabilize the situation, experts are urging the Turkish government to focus on developing social programs that provide support to low-income households. They anticipate that cash transfers and targeted government assistance will help raise the incomes of low-wage workers.

Notably, Turkey’s central bank left interest rates unchanged in October, stating that the recent inflation data "increases uncertainty." Experts interpret this as a hawkish signal from the regulator, indicating that monetary policy easing is unlikely to occur before 2025.