Turkish central bank rate cut expectations rise after 30% wage hike

Amodest increase in Türkiye’s minimum wage has strengthened expectations of a central bank rate cut, according to economists on Wednesday, as it showed the government’s determination to reach disinflation targets.

The net monthly minimum wage has been raised by 30% to TL 22,104 ($627), effective Jan. 1. The government said the level was set to maintain fiscal discipline and continue the fight against inflation.

The adjustment directly impacts some 9 million workers and is seen as a benchmark for the increase in private sector salaries. The hike fell short of demand by the workers’ union, which had requested an increase of around 70%.

Economists said the wage rise made it certain the Central Bank of the Republic of Türkiye (CBRT) would start a policy easing on Thursday.

To curb the growth in price gains, the bank has hiked rates by 4,150 basis points since June last year and has kept its benchmark policy rate steady at 50% since March.

“Expectations for a rate cut have risen, and I’ve revised my own forecast from a 150 basis point cut to 200 basis points. However, a 250 basis point cut wouldn’t be a surprise,” said Filiz Eryılmaz, chief economist at ALB Yatırım.

Hakan Kara, a former central bank chief economist who now teaches at Bilkent University, said on Tuesday that the modest wage hike cemented expectations that the CBRT will begin its rate-cutting cycle.

According to market surveys, the central bank is expected to start an easing cycle after eight months of steady policy. Economists expected the first rate cut to be between 150-250 basis points.

“This (minimum wage) increase, which is at the lower end of expectations, is expected to have an additional CPI impact of less than 1 point, and we believe it has eased the central bank’s hand in initiating interest rate cuts,” said Haluk Bürümcekçi, founding partner at Bürümcekçi Consulting.

Annual inflation declined to 47.09% in November from an annual high of 75% in May, mainly due to tight monetary and fiscal policies. The central bank sees it ending 2024 at around 44%.

The wage hike was seen as a major test of the government’s efforts to fight high inflation as it could pressure prices.

According to previous central bank research, a one percentage point increase in the minimum wage contributes 0.06 to 0.2 points to inflation. It is estimated that the new hike, which could impact inflation between 1.8-6 points, is mostly taken into account in its year-end inflation forecast of 21%.

The bank will announce its policy rate decision at 11 a.m. GMT on Thursday.