A single increase in the minimum wage proposal from the Central Bank, which sent an inflation letter to the government

The Central Bank of the Republic of Turkey (CBRT) sent an excuse letter to the government and proposed a single increase in the minimum wage per year.

In the post about the letter made on the bank’s social media account

In the letter sent to the Minister of Treasury and Finance Mehmet Şimşek with the signatures of Central Bank Governor Fatih Karahan, Deputy Governors Cevdet Akçay and Hatice Karahan, the inflation of 2023 was discussed and it was emphasized that the monetary policy would reduce inflation and said, “It will continue to be determined in a way that will provide the monetary and financial conditions that will reach the 5 percent target in the medium term.” will be.” expressions were used.

It was also emphasized in the letter that the monetary policy stance would be tightened if a significant and permanent deterioration in the inflation outlook was anticipated, and that policy steps would continue to be taken to support the monetary transmission mechanism in case of developments other than those anticipated in loan growth and deposit interest.

Letter from CBRT to the government

“In accordance with Article 42 of the Central Bank Law No. 1211, if the inflation target is not achieved, the Central Bank of the Republic of Turkey (CBRT) must notify the Government in writing and announce to the public the reasons for the deviation from the target and the measures to be taken. The inflation of 2023 will be around the target It was significantly above the uncertainty range set. This text explains the reasons why inflation deviated from the target and the measures taken and to be taken to achieve the target. Along with this document, the first “Inflation Report” of 2024, which includes analysis and evaluations of the factors affecting inflation in 2023 The “2024 Monetary Policy” text, which explains in more detail the monetary policy to be implemented to achieve the inflation target in the short and medium term, is attached for your information. Annual consumer inflation, which is 64.3 percent at the end of 2022, will be affected by the horizontal exchange rate in addition to base effects in the first half of 2023. The trend declined due to the impact of falling foreign currency import prices and energy subsidies. Thus, annual inflation was 38.2 percent in June. On the other hand, high increases in credit growth due to monetary conditions, wage updates and transfers to households made the impact of demand-side factors on inflation evident in the first half of the year. These developments caused the current account deficit to increase through gold and consumer goods imports, with the aim of protecting from inflation, and increased uncertainty in financial markets.

In addition, the supply-demand imbalances created by the Kahramanmaraş-centered earthquakes in February in the goods, services and labor markets, especially the housing market, and the short and medium-term effects of reconstruction activities on public finance increased the pressures on inflation. These developments negatively affected pricing behavior and paved the way for inflation, which decreased in the first half of the year, to increase in the second half.

In June 2023, the Monetary Policy Committee (Board) decided to initiate a strong monetary tightening process to establish disinflation as soon as possible, anchor inflation expectations and control the deterioration in pricing behavior. In this context, in the June-December period, the policy rate was increased by 34 points in total, from 8.5 percent to 42.5 percent. Simultaneously with monetary tightening, the macroprudential framework was simplified in a way that would increase the functionality of market mechanisms and strengthen macrofinancial stability. Monetary tightening was also supported by selective credit and quantitative tightening steps.

In the third quarter of 2023, the cumulative effects of the ongoing strong course of domestic demand, tax adjustments, exchange rate developments, wage increases, the rigidity in services inflation and the sudden rise in crude oil prices were effective in inflation dynamics. In addition, inflation increased due to the additional deterioration in pricing behavior caused by the simultaneous occurrence of all these developments in a short period of time. Within the framework of these developments, inflation increased by 23.3 points between June and September and reached 61.5 percent. 4.7 points of this increase is due to developments in fuel prices, including tax and excluding the exchange rate effect; 3.8 points are due to the increase in the exchange rate; The 2.8 score was due to tax increases other than fuel. In this period, when wage growth and demand were still quite strong, the additional deterioration in pricing behavior caused by the combination of shocks had an increasing effect on inflation by 10.0 points. The effect of factors other than these was limited to 2.0 points in total.

The first effects of monetary tightening were observed on financial conditions and began to be partially reflected in demand conditions. In the second half of the year, it was observed that external financing conditions improved significantly, reserves recorded a steady increase, demand conditions began to lose strength, which was reflected in the current account deficit, the share of Turkish lira deposits increased, and domestic and foreign demand for Turkish lira assets grew stronger. All these developments contributed to the effectiveness of monetary policy.

When looked at specifically in the last quarter of the year, annual consumer inflation increased at a limited rate of 3.2 points due to the effects of the monetary tightening process on financial conditions and domestic demand, and a significant part of this effect, 2.4 points, was upward due to the increase in natural gas consumption and households exceeding the free usage limit. caused by mechanical effect. During this period, the main trend of inflation also decreased. Pricing behavior showed relatively stronger signs of recovery, primarily in core goods, especially in durable goods groups. Although services inflation remains solid, the trend in transportation and food services inflation, which is more sensitive to demand and cost conditions, also slowed down in the last quarter. The ongoing excessive increases in housing prices were replaced by a one-month increase below inflation, and leading indicators pointed to a slowdown in the price increases of new rental advertisements. Followed core, statistical and model-based indicators pointed out that the main trend of inflation slowed down during the last quarter of the year. Thus, 2023 year-end inflation was 64.8 percent, close to the midpoint of the forecast range shared in the last Inflation Report of the year.

Last quarter developments revealed that there was a gradual retreat in the factors affecting inflation due to monetary tightening. During this period, external financing conditions, strengthening of reserves, improvement in the current account balance and demand for Turkish lira assets contributed to exchange rate stability and the effectiveness of monetary policy. By the end of 2023, the share of Turkish lira deposits has increased from 32 percent, where it decreased during the year, to over 42 percent, the annual growth of consumer loans has fallen from its peak of 60 percent to below 40 percent, and the annual growth of 12-month cumulative gold and consumer goods imports has reached its peak. It decreased from the point of 125 percent to 53 percent.

Entering 2024, the Board increased the policy rate to 45 percent at its January meeting, and kept it constant in February, taking into account the delayed effects of monetary tightening and other policy steps that support monetary transmission. By March, the main trend of monthly inflation was higher than expected, and recent indicators pointed out that the resilient course in domestic demand continued. In this context, the Board increased the policy rate to 50 percent at its March meeting, taking into account the deterioration in the inflation outlook. Additionally, by changing the operational framework, the Central Bank decided to determine overnight borrowing and lending rates with a margin of -/+ 300 basis points compared to the one-week repo auction interest rate. The change in the operational framework is a technical correction considering the high level of interest rates, and the one-week repo auction interest rate will continue to be used as the main policy rate.

CBRT will maintain its tight monetary policy stance until there is a significant and permanent decline in the underlying trend of monthly inflation and inflation expectations converge to the predicted forecast range. If a significant and permanent deterioration in the inflation outlook is anticipated, the monetary policy stance will be tightened. Your determined stance in monetary policy; It is anticipated that the main trend of monthly inflation will decrease and disinflation will be established in the second half of 2024 through balancing in domestic demand, real appreciation in the Turkish lira and improvement in inflation expectations.

The main purpose and priority of the CBRT is to ensure price stability. Monetary policy will be established for this purpose. The one-week repo auction interest rate will continue to be the policy interest rate, and in case of developments other than anticipated in loan growth and deposit interest, policy steps will continue to be taken to support the monetary transmission mechanism.

As stated in the 2024 Monetary Policy text, the indicators intended to guide economic units regarding the course of inflation in the future are inflation forecasts in the short term and inflation targets in the medium term. In this context, monetary policy will continue to be determined to provide monetary and financial conditions that will reduce inflation and reach the 5 percent target in the medium term. It is predicted that by maintaining the monetary stance, inflation will reach 36 percent at the end of 2024, and will stabilize at 5 percent after decreasing to 14 percent at the end of 2025 and 9 percent at the end of 2026. The rigidity in services inflation, inflation expectations, geopolitical risks and food prices keep the risks on inflation alive.

The coordination of monetary and fiscal policies is of great importance in the disinflation process, and the assumptions about public policies embodied in the Medium Term Program (MTP, 2024-2026), which provides increased predictability, are reflected in the inflation forecasts of the CBRT. In this context, updating the minimum wage once a year, observing the inflation forecasts presented in the MTP in managed prices and wage and tax adjustments, and supporting the tight stance in monetary policy with prudent fiscal policy are of critical importance in establishing the envisaged disinflation path.

Other measures supporting price stability and financial stability announced within the scope of the MTP are also expected to contribute to the disinflation process. Adhering to the medium-term targets announced in the MTP, in line with the disinflation path, will play a critical role in establishing price stability. On the other hand, continuing structural reforms that will reduce the rigidity and volatility in inflation and supporting technological and digital transformation that will improve supply capacity will contribute positively to price stability and therefore social welfare in the medium and long term. “In this context, the CBRT will continue its efforts to analyze structural elements, develop relevant policy recommendations and raise awareness among relevant stakeholders and the public about the importance of fighting inflation.”