Erkan appointed by Erdogan to lead Turkey’s central bank, stirring up confusion and unpredictability in policy shift projection.
On Friday June 10, 2023, President Tayyip Erdogan made a surprising move by appointing an American finance executive, Hafize Gaye Erkan, as the head of Turkey’s central bank. This comes after years of rate cuts and a cost-of-living crisis that has simmered in the country. Erkan is a former co-CEO at First Republic Bank and managing director at Goldman Sachs, and she takes over just under a week after Erdogan hinted at a pivot away from unorthodox policies with a new cabinet.
Erkan is the first female governor of the central bank, but she is also the fifth chief to take the position in only four years. This highlights the challenge she may face delivering a lasting policy turnaround, as Erdogan has done little to maintain the bank’s independence in recent years.
Erkan replaces Sahap Kavcioglu, who led Erdogan’s rate-cutting drive that set off a historic currency crash in 2021 and sent inflation to a 24-year peak of above 85% last year. Erkan’s appointment in the Official Gazette was accompanied by a decision to appoint Kavcioglu as head of the BDDK banking regulator, causing some investors to worry that remnants of Erdogan’s unorthodoxy will remain.
The move has left many wondering whether Erkan will be granted the independence to steer monetary policy towards “rational policies.” Selva Demiralp, an economics professor at Koc University and a former U.S. Federal Reserve economist, says that Erkan must ensure that the preference towards low interest rate policies is left in the past to gain credibility and anchor market expectations with the minimum dose of rate hikes.
Erkan’s appointment has raised questions due to her lack of formal monetary policy experience in a career that spanned Wall Street and U.S. corporate boardrooms. She received a Ph.D. from Princeton University in financial engineering and was at First Republic from 2014-2021. This year, the bank became the largest in the United States to fail since 2008 after it was seized by regulators and sold to JPMorgan.
Analysts anticipate Turkey’s central bank will hike interest rates to between 20% and 25% from 8.5%, signalling a U-turn in the country’s economy due to depleted foreign reserves, unchecked inflation, and wide current account deficits.
Erdogan, who has long been an “enemy” of interest rates, has pressed the central bank to deliver stimulus in recent years and has been quick to replace its governor. He embraced orthodoxy last week by naming Mehmet Simsek, a well-respected and orthodox former finance minister, as the minister in charge of the economy. Simsek met with Erkan earlier this week before her appointment.
The lira has hit all-time lows this week, plunging 7.2% on Wednesday alone and traded at 23.5 against the dollar on Friday after Erkan’s appointment. Analysts say the return of Simsek and the appointment of Erkan set the stage for rate hikes, which could lure back foreign investors after an exodus in recent years.
However, the last central bank governor to raise rates, Naci Agbal, was fired in 2021 after less than five months on the job. Analysts suggest that it is unclear how long Erdogan may tolerate a more pragmatic stance on the economic front. Wolfango Piccoli of Teneo stated, “Kavcioglu’s nomination signals that Erdonomics is still alive and can bite back at any time.”
Before her appointment as head of Turkey’s central bank, Erkan served on Marsh McLennan’s board and was named CEO of the real estate finance and investment firm Greystone last year. Kathryn Wylde, CEO of the Partnership for New York City nonprofit and a former director under Erkan, described her as a “tough, smart, and effective” individual who cannot be pushed around but can disagree without being disagreeable.
Additional reporting by Ali Kucukgocment; Writing by Jonathan Spicer and Daren Butler; Editing by Cynthia Osterman and Hugh Lawson