The credit rating agency S&P announced its expectations for the minimum wage increase rate in Turkey.

S&P Global Ratings Senior Director Frank Gill stated that the impact of the Central Bank of the Republic of Turkey raising the policy interest rate to 50% has begun to show, saying, "The economy is rebalancing. The 12-month current account deficit is around 1% of GDP as of August." He noted that the driving force behind the rebalancing of the economy is households transitioning from foreign currency to Turkish Lira in the deposit base, and this situation has greatly contributed to the Central Bank's accumulation of foreign exchange reserves, stating, "Currently, the net external financing need has largely decreased."

HE EXPLAINED THE EXPECTATION FOR MINIMUM WAGE

Gill recalled that the credit rating outlook has been determined as stable, stating, "The reason for this is that, going forward, the implementation of the next phase of the disinflation and rebalancing program is likely to be somewhat more challenging." He explained that while service inflation in Turkey has decreased, it remains significantly above headline inflation, and like many countries, its stickiness could be one of these challenges. He also mentioned that the large gap between households' 12-month forward inflation expectations and market participants' expectations could be one of the challenging factors, continuing, "We are monitoring whether decisions regarding income policy will be closely coordinated with next year's inflation target within the Medium-Term Program. If the minimum wage increase is more aligned with past inflation, there could be questions about how quickly they can reduce headline inflation. Our expectation is that the minimum wage will likely be increased to an average between last year's and this year's inflation target. We forecast inflation to be around 44% by the end of this year. So, with 44%, the average of the target of 17% is about 30%. This is obviously an important decision because the cost of living has increased significantly. This is not unique to Turkey, but I think the pressures in Turkey have been more intense than in Europe and Eastern Europe. In this regard, we believe that disinflation will take a long time."

"THE FIRST INTEREST RATE CUT MAY COME AT THE END OF THE FIRST QUARTER OF 2025"

Gill expressed that they previously anticipated the Central Bank would start to cut the policy interest rate in November, and they updated their forecasts after the inflation figures in September. He stated that the first interest rate cut could be at the end of the first quarter of 2025, saying, "Considering that we still forecast the year-end inflation for 2025 to be around 22-23%, we believe that the decline in interest rates will likely be towards the end of the first quarter of 2025. The Central Bank will proceed with a rather conservative interest rate cut. According to our view, the policy rate will still be significantly above forward inflation expectations, and they will closely monitor the exchange rate, reserve levels, and capital flows."

"WE CANNOT IGNORE THE POSSIBILITY OF GROWTH BELOW 2%"

Gill reported that they expect the Turkish economy to grow by 3.1% this year, noting that growth will slow to 2.3% in 2025. He stated, "Considering the population growth and the expected demand recovery in Turkey's key trading partners in Europe, negative growth would be very unusual. However, we cannot ignore the possibility of growth below 2%. If inflation does not decrease, the Central Bank will need to maintain an even tighter policy stance."