IMF Warns Türkiye: Inflation Fight Hinges on 'Moderate Wage Growth' and Tighter Policy

The Wage Warning: Curbing Inflationary Inertia

The core of the International Monetary Fund's recent assessment of Türkiye's economy centers on the battle against persistent inflation, which the Fund expects to decline but remain at elevated levels. A key recommendation delivered by the IMF staff is the necessity of ensuring "moderate wage growth" in the coming periods.

This caution comes as Türkiye faces the challenge of "waning inertia," where the cycle of high past inflation feeds into demands for corresponding high wage increases, effectively baking inflation into the economy's future structure. The IMF analysts stressed that for the disinflationary process to succeed, wage and price policies must be aligned closer to expected future inflation rather than being indexed to past high Consumer Price Index (CPI) readings.

Projections Show Slow Disinflation

While acknowledging the Turkish authorities' commitment and the successful efforts to reduce the budget deficit (projected to decline from 4.7% of GDP in 2024 to 3.6% in 2025), the IMF's forecasts highlight the steep climb ahead for price stability.

The IMF projects inflation to end 2025 at 33%, significantly above the Central Bank of the Republic of Türkiye's (CBRT) target of 24%. Although expected to decline further in 2026 to 22%, inflation is projected to remain in double digits in the medium term, posing a drag on investment and productivity.

Call for Continued Tight Policy Stance

The report emphasizes that current policies may "not be tight enough" to secure the necessary disinflation trajectory. In light of recent interest rate cuts by the CBRT, the IMF urged policymakers to proceed with caution.

• Monetary Policy: The Fund recommended maintaining a firm disinflation trajectory by ensuring positive ex ante real interest rates and postponing further rate cuts until sequential inflation figures consistently align with the CBRT's targets.
• Fiscal Measures: To strengthen fiscal buffers and support disinflation, the IMF called for additional revenue measures. These include streamlining the Value-Added Tax (VAT) structure, broadening the tax base, and rationalizing generous corporate tax expenditures and incentives.
• Social Safety Net: Crucially, the IMF stressed that as subsidies are phased out and tax measures are implemented, the government must simultaneously strengthen the social safety net to safeguard vulnerable households disproportionately affected by the prolonged high inflation.

Overall, the IMF commended the authorities for policy successes, including the successful phasing out of foreign exchange-protected deposits (KKMs) and the strengthening of gross international reserves. However, the report is clear: only sustained, tight, and comprehensive fiscal, monetary, and incomes policies—particularly prudent wage setting—will anchor expectations and put Türkiye on a more resilient and robust economic path.