(Bloomberg) -- The International Monetary Fund urged Turkey to accelerate its fight against inflation, highlighting a politically sensitive upcoming wage hike as a potential turning point.
“The authorities’ gradual approach to fighting inflation prolongs the period during which risks might occur”, the fund said in a statement on Friday after a routine visit to member states known as an Article IV consultation.
It recommended “larger and more frontloaded” steps to cut the budget deficit and “urged authorities to press ahead with coordinated fiscal, monetary, and incomes policies.” In particular, it said indexing wages to inflation expectations rather than past inflation could “significantly help” to curb prices.
Walls Street banks are closely watching for signs of how much the government will increase the minimum wage by in 2025, with Deutsche Bank citing a consensus expectation of 25%-30% after a recent visit.
Turkey hiked the minimum wage twice in 2023 in a bid to help workers facing a spiraling cost-of-living crisis in an election year. In 2024 the government only raised it once despite calls from labor confederations and opposition parties.
Turkey has gradually increased policy rates to 50% from 8.50% President Recep Tayyip Erdogan’s re-election in May 2023 paved the way for an economic U-turn. Despite the tightening, the latest data showed inflation falling slower than expected in September to 49.4%, due to persistent price expectations and services costs.
Other highlights from the IMF statement:
- “Directors called for continued tight, data dependent monetary policy until inflation converges to target levels”
- “Further strengthening the monetary transmission mechanism and central bank independence and communication would enhance policy credibility”
- “Capital flow measures should be discontinued gradually as FX liquidity risk and inflation recede”
- “Macroprudential policies should focus on containing systemic risks”
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