Basci Says Turkey Two Years From Price Stability as Wages Raised

  • Central bank governor says inflation to miss target again
  • Turkish government recently boosted minimum wage by 30 percent

Turkey’s central bank, on course to miss its inflation target for a sixth year, urged the government to take action to curb price increases after handing the country’s lowest earners a 30 percent raise.

The pay increase for about 5 million minimum-wage workers was the biggest single factor pushing up the bank’s 2016 annual inflation forecast by a percentage point to 7.5 percent, Governor Erdem Basci said Tuesday. The bank’s target is 5 percent. Price stability will now only be achieved in 2018, Basci said, adding that ministers should focus on consumers when making decisions rather than on the producers relevant to their portfolios.

“The fight against inflation requires collective effort,” Basci said after presenting his first quarterly inflation report of the year. “Policies for public revenue and wages, as well structural elements in food prices, are an important part of the fight against inflation.”

Basci said 18 months ago that a favorable price environment would allow Turkey to finally meet its inflation target in 2015, and that inability to do so would be an indicator of structural problems beyond the central bank’s reach. While rising salaries and government pressure to lower interest rates haven’t helped, the central bank deserves criticism for failing “spectacularly” in a year of falling oil prices, according to Nigel Rendellat Medley Global Advisors.

Curbing inflation is a critical issue for Turkey, which relies on foreign capital inflows to finance its current-account deficit.

‘Try Harder’

“Ultimately, the central bank is responsible for inflation,” Rendell, a senior emerging-markets analyst for Medley in London, said by e-mail. “It really needs to get its head down, ignore the politics and try harder.”

The decision to increase the monthly minimum wage to 1,300 liras ($431) will add about a percentage point to headline inflation this year, while higher prices for tobacco, alcohol and other itemsdue to tax adjustments will add another 0.4 percentage point, Basci said.

Inflation accelerated to 8.8 percent in December due to higher-than-forecast increases in food prices and spillover from a weak currency, which pushes up the cost of imports. The lira lost about 20 percent last year.

Policy makers introduced measures to support foreign-exchange liquidity in August, and steps to keep access to credit tight and the currency stable since then have been key to the central bank’s effort to curb inflation this year, Basci said.

The government’s wage increase has compounded the bank’s poor track record on inflation, according to Mehmet Besimoglu, Istanbul-based chief economist at Oyak Menkul Degerler. The impact on prices will be felt mainly in January, Besimoglu said in an e-mailed note.

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