Turkish President Recep Tayyip Erdogan named Hafize Gaye Erkan as the new central bank governor, replacing Sahap Kavcioglu in a move that may signal a return to more conventional monetary policy.
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The announcement, made through a decree in the Official Gazette, completes a makeover of Erdogan’s top economic team after Mehmet Simsek’s appointment as treasury and finance minister. In his time as governor, Kavcioglu never deviated from Erdogan’s belief that lowering interest rates can slow inflation.
Erkan, a former banking executive in the US, is the Turkish monetary authority’s first female chief. She previously worked at Goldman Sachs Group Inc. and San Francisco-based First Republic Bank, which collapsed in May, more than a year after Erkan stepped down as co-chief executive officer.
Her appointment was taken by markets as a sign of possible normalization in Turkey’s monetary policies after years of ultra-low borrowing costs. Her success will also depend on how much policy autonomy she will enjoy under Erdogan, according to Nick Stadtmiller, head of product at Medley Global Advisors.
“Erkan’s appointment hopefully marks an improvement over the policies of her predecessor,” he said. “The lingering question is whether Erdogan will allow the central bank to raise rates sufficiently to bring down inflation.”
The lira was quoted weaker early in Asia on Friday, according to indicative pricing from Bloomberg. The currency was indicated down almost 2%, which would mark a fresh record low. The quote reflects market levels and not necessarily traded prices.
Erdogan’s Policies
The Turkish central bank has been at the center of the growth-at-all-costs strategy that Erdogan has pursued since he turned his office into the nexus of all executive power in 2018. Erdogan argues lower interest rates slow inflation, a belief that contradicts conventional economic theories.
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Before installing Kavcioglu as governor in March 2021, Erdogan ousted his three predecessors for tightening monetary policy too much as he wielded more power over the direction of interest rates.
Kavcioglu never deviated from Erdogan’s guidance on borrowing costs. Despite price growth reaching a peak of 86% last year, the central bank under his stewardship delivered zero rate hikes and instead slashed the benchmark to 8.5% from 19% at the start of his tenure.
Kavcioglu was named the new head of Turkey’s banking regulator, according to a separate presidential decree published on Friday.
Erdogan was reelected in May on promises of further rate cuts before giving control of the economy to Simsek, who immediately signaled that Turkey had no choice but to make it a priority “to fight inflation on a rational basis.”
The next rate-setting meeting, scheduled for June 22, will show whether Erdogan will acquiesce to tighter policy in his new term.
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(Updates with lira in sixth paragraph.)
