Erdogan’s new central financial institution chief indicators hope for Turkey’s financial turnaround

ANKARA, Turkey (AP) – Turkey’s President Recep Tayyip Erdogan has appointed a former US bank executive to head the central bank…

ANKARA, Turkey (AP) — Turkey’s President Recep Tayyip Erdogan on Friday appointed a former U.S. bank executive to head the central bank, sending the strongest signal yet that the newly re-elected leader may be backing away from his unusual economic policies that many advocate blame the worsening cost of living crisis.

Hafize Gaye Erkan, 41, has a Princeton education and will be the first woman to head Turkey’s central bank. In 2021, she briefly served as co-chief executive officer of First Republic Bank, which became the second-largest US bank to fail last month as its wealthy customers pulled out their money during the broader industry turmoil.

Her nomination follows last week’s appointment of Mehmet Simsek, an internationally renowned former banker, as finance and finance minister. He was a former finance minister and deputy prime minister under Erdogan, returning from politics after a five-year hiatus.

The selection of two key financial positions has raised hopes that Erdogan, who was re-elected to a third term last month, is backing down from his insistence that lower interest rates will combat Turkey’s soaring inflation. The rate peaked at 85% in October and people are struggling to afford food, housing and other necessities.

Critics blame the cost-of-living crisis on Erdogan’s unorthodox approach that runs counter to conventional economic thinking – that raising interest rates would fight inflation. Central banks like the US Federal Reserve, the European Central Bank and others around the world are raising the cost of borrowing to curb consumer price inflation.

Erkan’s appointment “is an important step towards more credible economic policy and encourages President Erdogan to relax his grip on the central bank,” said Liam Peach, chief emerging market economist at Capital Economics.

“Recent political appointments must now be translated into policy action so investors can be confident that this shift towards orthodoxy is the real deal,” he said.

The next steps are crucial as the economy grapples with a plummeting currency and still-high inflation at 39.5%. The central bank will meet later this month to decide on interest rates – a key indicator of the course of Turkey’s economy.

In recent years, Erdogan has sacked three central bank governors for failing to comply with his rate-cutting policy.

“Erkan needs to be given the freedom to raise interest rates a lot,” Peach said. “A sharp rate hike from about 8.5% to about 20% would send a very strong signal that a credible policy shift is at hand.”

It must also show that it is important to keep interest rates high in order to curb inflation. While higher borrowing costs are meant to fight inflation, they can slow economic growth as borrowing becomes more expensive.

This could be another pain point for households and businesses whose food and energy costs have skyrocketed in the wake of Russia’s invasion of Ukraine and whose currency has hit record lows against the US dollar.

Erkan was CEO of investment banking firm Goldman Sachs and worked at San Francisco-based First Republic Bank, where he served as co-CEO for six months in 2021. JPMorgan Chase took over the failed bank after US regulators seized it in May.

She replaces Sahap Kavcioglu, who has overseen a series of rate cuts since 2021. Kavcioglu will now head the Turkish banking supervisory authority BBDK.

“The appointment of Kavcioglu – a proponent of Erdogan’s ‘new economic model’ – as head of banking supervision is a powerful reminder that Erdonomics can retaliate at any time,” said Wolfango Piccoli, co-president of London-based risk consultancy Teneo.

Erkan will have to rebuild the central bank “after years of mismanagement, purges and demotions,” Piccoli wrote in a note.

“Like most other important institutions, the (central bank) has lost its independence and has been undermined by Erdogan’s drive to centralize power, with key tasks being given to loyalists and cronies,” he said.

Copyright © 2023 The Associated Press. All rights reserved. This material may not be published, broadcast, written or redistributed.