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

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 stabilise 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.