'Soaring Prices' Turkey, Another Reverse Move Cutting Benchmark Interest Rate + Minimum Wage Raised by 50%

President Erdogan "Protect Workers from Soaring Prices"... Real Wages Drop 27% Due to Lira Collapse

President Recep Tayyip Erdogan of Turkey [Photo by AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] Turkish President Recep Tayyip Erdogan announced a 50% increase in the minimum wage on the 16th (local time), according to major foreign media reports on the same day. President Erdogan announced the minimum wage hike, stating that he would protect the Turkish people from soaring prices. However, there are criticisms that President Erdogan himself is the main cause of rising prices in Turkey.

In a statement released that day, President Erdogan said that the real monthly salary excluding taxes would rise from 2,826 lira (approximately 213,956 won) this year to 4,250 lira next year. President Erdogan said, "I believe the minimum wage increase shows our determination not to abandon workers who have been harmed by rising prices." It is known that about 40% of Turkish workers earn income at the minimum wage level.

Turkey's consumer price inflation rate soared to 21.3% in November. As living costs rise, recent government approval ratings have fallen, and protests condemning the government have also taken place.

Despite the rapid rise in prices, the Central Bank of Turkey is lowering its benchmark interest rate. At the monetary policy meeting on the same day, the Central Bank of Turkey cut the benchmark interest rate by 1 percentage point. Typically, as prices rise, the benchmark interest rate is raised to absorb the money supply, but the Central Bank of Turkey is showing the opposite trend. The Central Bank of Turkey has decided to cut the benchmark interest rate for four consecutive months recently, and during this period, the benchmark interest rate fell from 19% to 15%.

The reason the Central Bank of Turkey continues to make irrational benchmark interest rate cuts is President Erdogan. President Erdogan demands the central bank lower the benchmark interest rate, claiming that high interest rates are the cause of high prices. President Erdogan argues that reducing the interest burden will increase exports, investment, and employment, and ultimately stabilize currency and prices. On the same day, after the central bank's decision to cut the benchmark interest rate, President Erdogan announced the minimum wage increase plan.

Although the government announced a significant upward adjustment of the minimum wage that day, due to the sharp depreciation of the lira this year, there is expected to be no real wage increase effect. While wages increase by 50% in lira terms, calculating real wages in dollar terms actually shows a 27% decrease compared to the beginning of this year. This is because the lira's value has plummeted by more than 50% compared to the start of the year. At the beginning of this year, the lira was traded at around 7 lira per dollar, but it is currently trading at around 15 lira per dollar. According to financial information firm Refinitiv, after the central bank's benchmark interest rate decision that day, the lira's value plunged by up to 5.2%, trading at 15.595 lira per dollar.

In a situation of high economic uncertainty due to COVID-19, the central bank governor who raised the benchmark interest rate to respond to rising prices was dismissed, and subsequently, benchmark interest rate cuts continued, causing the lira's value to fall this year.

Experts point out that President Erdogan's unprecedented economic policy response could cause serious side effects. If the benchmark interest rate continues to be lowered on the grounds that high interest rates cause inflation, the lira's value will fall further, and rising prices will make households more difficult, potentially leading to an economic crisis.

Professor Selva Demiralp of Koc University in Istanbul pointed out that if the minimum wage is raised because prices rise, the increased wages will cause prices to rise even more.

Given Turkey's high dependence on energy and raw material imports, the depreciation of the lira due to benchmark interest rate cuts inevitably places a significant burden on the economy.

This content was produced with the assistance of AI translation services.