Turkey shelves tax hike on alcohol, tobacco in move seen curbing inflation

ANKARA (Reuters) - Turkey said on Tuesday it will not implement an automatic tax hike on alcohol and tobacco products in the first half of 2020, in a move expected to curb inflation and raise prospects for a more interest rate cuts.

The fixed tax is generally imposed automatically each year on alcohol and tobacco products in line with producer price inflation. But Turkey’s Official Gazette published a presidential decision saying it would not be implemented in the first half.

Economists said the move would put a further brake on inflation, which tumbled throughout 2019 from multi-year highs logged in the previous year. The overall year-over-year price gauge was 10.6% in November.

“We think this decision will significantly limit the rise in inflation due to the base effect in the first quarter. The possibility for annual inflation to rise above 12% weakened,” said Erkin Isik, the chief economist in QNB Finansbank.

“This decision increased the possibility for the central bank to go for a limited policy rate cut in January.”

Turkey’s central bank had hiked its policy rate to 24% to stabilize inflation following a 2018 currency crisis which erased some 30% off the lira’s value. But since July, it has cut its one-week repo rate by 12 percentage points to 12%.

“We had assumed a total 16% price increase in 1H20 in that group ... The absence of those would lower our mid-2020 CPI inflation forecast by 70bps,” BCG Partners said in a note to clients.

The impact on the budget will be limited, BCG Partners also said, estimating the loss of revenues for the central government budget would be around 0.1% of gross domestic product.

Last week Turkey announced another move that could keep more cash in Turks’ pockets: it raised the minimum wage by 15.03% for 2020, more than inflation.

Reporting by Nevzat Devranoglu, Mehmet Dinar and Ceyda Caglayan; Editing by Daren Butler and Jonathan Spicer