How will Turkey's 6% fuel tax rise impact inflation?

The move will not hamper its 2025 inflation goal, country's finance minister says

People buy food outside a market at Eminonu commercial area in Istanbul. Turkey raised fuel taxes by 6 per cent to address its widening fiscal deficit and stabilise the country's finances without affecting the 2025 inflation goal. APShow less

Turkey on Monday raised its fuel tax, with an aim to address its widening deficit and stabilise the country's finances, while stressing that the move will not affect its inflation goal.

The special consumption tax per litre of fuel has been increased by about 6 per cent, according to a presidential decree published in the Official Gazette.

Turkey’s Treasury and Finance Minister Mehmet Simsek said on Sunday that the tax increase would be implemented in a manner that will not jeopardise the country’s 2025 inflation goal. He also reaffirmed the government’s commitment to maintaining a recent decline in inflation, according to media reports.

The fuel tax is revised every six months in line with the producer price index.

“A 6 per cent increase to the special consumption tax on fuel is less than the 7 per cent producer price inflation of the last five months,” said Hasnain Malik, emerging and frontier markets equity strategy at Tellimer.

“[It] is completely in line with Mr Simsek's guidance that the reduction of inflation will be prioritised over tax rate increases,” he told The National.

However, Mr Malik said that if the government's tax revenue, adjusted for inflation, falls short of expectations, it may need to implement spending cuts to meet its target of keeping the fiscal deficit at about 3 per cent of gross domestic product in 2025.

“That will pressure already low growth.”

Egyptian President Abdel Fattah El Sisi, right, welcomes Turkish President Recep Tayyip Erdogan at Cairo Airport on February 14. EPA

Mr Erdogan, left, on his first visit to Egypt in 11 years, with Mr El Sisi. AP

The visit caps the recent thaw in relations between Cairo and Ankara after years of tension. AFP

Mr Erdogan, right, reviewed a guard of honour with Mr El Sisi before their talks at Al Ittihadiya Palace in Cairo. AP

The two presidents shake hands. AP

Mr El Sisi, centre right, his wife Entissar Amer, right, and Mr Erdogan, centre left, and his wife Emine Erdogan, left, during their meeting in Cairo. EPA

Turkey's annual inflation rate eased in November for the sixth consecutive month, reaching 47.1 per cent, down from 48.6 per cent in October, official data showed in December. This was mainly due to tight monetary and fiscal policies as the central bank raised interest rates.

The central bank began raising interest rates in the middle of last year to bring down inflation after it abandoned President Recep Tayyip Erdogan’s unorthodox policy of keeping rates low to spur growth.

However, the high-interest-rate environment weighed on the country's economy, with GDP growing by 2.1 per cent in the third quarter of 2024, falling short of the market consensus of 2.6 per cent, according to ING Think.

This prompted Turkey's central bank to reduce interest rates last week for the first time since February last year.

The Monetary Policy Committee lowered its benchmark one-week repo rate to 47.5 per cent, from 50 per cent. This came after it kept the rate on hold for eight consecutive months.

However, the committee said at the time that its decision does not necessarily mean rates will continue to be lowered during future meetings.

The tight monetary stance will be maintained until a “significant and sustained decline” in the underlying trend of monthly inflation is observed and inflation expectations “converge to the projected forecast range”, it said.

In November, the central bank raised its inflation forecast for 2024 to 44 per cent from the previous estimate of 38 per cent and for 2025 to 21 per cent from 14 per cent, attributing the revisions to rising food prices and housing rents.