Turkey threatened by the next inflation hammer

Inflation in Turkey is gaining momentum. The central bank is fighting this with massive interest rate hikes. The success is limited.

Turkey is unable to get a grip on its high inflation. Although the central bank has raised the key interest rate to a whopping 42.5 percent, the general price level rose by almost 65 percent in December. The inflation rate thus reached its highest level for a good year. And now the next price surge is looming.

The reason is the surprisingly sharp increase in the minimum wage. Labor Minister Vedat Isikhan announced at the end of last year that the monthly minimum wage would rise to the equivalent of 520 euros in 2024. This corresponds to an increase of 49 percent compared to the level set in July. Compared to January 2023, it is even a doubling. Around seven million Turks will benefit from the higher minimum wage.

The minimum wage in Turkey is normally adjusted once a year. However, due to high inflation and the weakness of the national currency, the lira, the government has raised it every six months over the past two years. The latest increase will have a "significant impact on inflation", the news agency Reuters quotes an economist who wishes to remain anonymous. The logic behind this: Companies try to cushion higher wage costs with higher prices.

"Prices will rise by at least 25 to 30 percent," said Berke Icten, chairman of the Turkish Shoe Manufacturers Association. This will be reflected in retail prices, he added. "A two-stage increase in the minimum wage would have been better for both employees and employers and would not have caused a sudden surge in inflation," said Icten. The central bank is currently assuming that inflation will shoot up to 75 percent by May and thus reach a new peak. For the end of the year, the bank predicts a rate of 36 percent.

Edogan is "enemy of interest rates"

After inflation in Turkey reached over 80 percent in 2022, it fell noticeably over the course of last year. Inflation rates of below 40 percent were reached at times before inflation accelerated again since last summer.

The inflation problem in Turkey is largely home-made: until his re-election, President Recep Tayyip Erdogan had enforced a loose monetary policy by the - only formally independent - central bank, even though inflation was threatening to get out of control.

Erdogan describes himself as an "enemy of interest rates", sees interest rates as the "mother of all evils" and claims, contrary to past practical experience and economic doctrine, that low interest rates cause low inflation and high interest rates cause high inflation.

In order to push through this unorthodox monetary policy, Erdogan fired several central bank governors and finance ministers until he found a central bank governor who fulfilled his wish for low interest rates. In the meantime, the head of the statistics authority had to go. Erdogan had accused him of exaggerating the extent of inflation.

Central banker moves in with her parents

Although the loose monetary policy fueled inflation and the currency crisis, it also ensured economic growth - a key reason for Erdogan's popularity with his voters. He believed that the record inflation was temporary and merely collateral damage on the way to his re-election.

A few days into his third term in office, Erdogan pulled the emergency brake on monetary policy last summer and appointed Hafize Gaye Erkan as head of the central bank. She followed economic doctrine and raised the key interest rate from 8.5 percent to its current level. The logic behind this: If loans become more expensive, this slows down both consumption and investment and therefore demand. This tends to dampen prices. However, it takes time for interest rate hikes to take full effect. The rule of thumb is between 12 and 18 months.

The central banker Erkan had moved from New York to Istanbul to take up her new job. In view of the extremely high and rapidly rising rents in the metropolis of millions, she lives with her parents. "We haven't found any accommodation in Istanbul," she recently told the newspaper "Hürriyet". "It's terribly expensive."

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Despite President Recep Tayyip Erdogan's opposition to high interest rates, the Turkish central bank, under the leadership of Hafize Gaye Erkan, has implemented significant interest rate hikes to combat inflation. The central bank's efforts, however, have not been enough to prevent Turkey's inflation rate from reaching an annual high of nearly 65% in December 2022.

In response to the central bank's rate hikes and amidst rising inflation, Erdogan announced an unexpected increase in the minimum wage, which is set to double by January 2023. This move, according to economists, is likely to further exacerbate inflation as companies attempt to pass on increased wage costs to consumers in the form of higher prices.

Source: www.ntv.de