Despite the Turkish central bank’s sharp interest rate increases, the country’s high inflation is not easing. The increase in the minimum wage in the new year is fueling fears of further price increases.
In December, the already high inflation in Turkey continued to rise. Consumer prices rose 64.77 percent year-on-year, the National Statistics Office said today in Ankara, up from 62 percent in November. The inflation rate has risen for the second month in a row and has reached its highest level in over a year.
Price increases in hotels and restaurants in particular have contributed to fueling inflation before the turn of the year. Prices in the catering industry almost doubled in December year-on-year. The weakness of the local currency, the lira, also plays a role. Last year it depreciated by 37 percent against the dollar, making imports more expensive and exacerbating the cost of living crisis for Turks.
Strong interest rate increases in 2023
In the fight against inflation, the central bank has raised the key interest rate from 8.50 to 42.50 percent in 2023 – but so far with little success. Inflation surged after a currency crisis in late 2021, reaching a 24-year high of 86 percent in October 2022.
Last year, inflation fell noticeably again, at times to below 40 percent, before inflation tended to increase again since last summer. Observers blamed the massive spending programs announced by President Recep Tayyip Erdogan, who has now been re-elected, particularly with a view to the presidential election.
After the election, the Turkish central bank also changed its monetary policy course. Erdogan had previously opposed interest rate increases for a long time. After his re-election, he appointed former Wall Street banker Hafize Gaye Erkan as central bank chief and liberal economist Mehmet Simsek as finance minister. They increased the key interest rates in several steps – only in December did the rate rise by 2.5 points to 42.5 percent.
Minimum wage will increase by 49 percent in 2024
According to experts, there is a risk of a new wave of inflation following the unexpectedly large increase in the minimum wage. “Prices will increase by at least 25 to 30 percent,” said Berke Icten, chairman of the Turkish Shoe Manufacturers Association.
Labor Minister Vedat Isikhan had announced that the monthly minimum wage would rise to 17,002 lira (519 euros) in the new year. This represents an increase of 49 percent compared to the level set in July. Compared to January 2023, it has even doubled. Around seven million Turks will benefit from the higher wage floor.
Is there a risk of further increases in inflation?
Because of high inflation and the weak lira, the government has increased the minimum wage every six months for the past two years. Employers do receive support to mitigate the consequences. However, this is lower than expected, explained business associations.
The increase will have a “significant impact on inflation,” said an economist who spoke on condition of anonymity. The inflation rate could reach around 70 percent in the first half of 2024. Despite the significant increase, the minimum wage would fall after adjusting for inflation if there was no further increase in the middle of the year.