Market: To curb inflation, Erdogan hands over the reins of the central bank to Hafize Gaye Erkan

(BFM Bourse) – Turkish President Recep Tayyip Erdogan on Friday appointed Hafize Gaye Erkan, a former Wall Street executive, as head of the Turkish central bank. Favoring a more conventional monetary policy, its mission will be to stem the decline in the Turkish lira and inflation, which in May still reached nearly 40% over a year.

Turkish President Recep Tayyip Erdogan on Friday appointed a former Wall Street executive, Hafize Gaye Erkan, to head Turkey’s central bank, signaling a possible shift toward a more conventional policy to fight inflation.

Ex-number 2 at the US bank First Republic and former director of Goldman Sachs, she advocates a return to financial orthodoxy. In particular, Hafize Gaye Erkan defends the increase in policy rates to counter inflation, which in May still reached almost 40% over a year in Turkey.

This holder of a doctorate from the prestigious American University of Princeton will be the first woman to head the Turkish central bank.

President Erdogan, who was re-elected on May 28 for a third term, had already last week appointed a new economy minister, Mehmet Simsek. The former economist at the US bank Merrill Lynch, highly respected in the business community, is also promoting a return to orthodoxy to restore stability and regain investor confidence.

When he took office on Sunday, Mehmet Simsek, already economy minister (2009-2015), then deputy prime minister in charge of the economy (until 2018), warned that a return to “rational measures” would be needed to revive the Turkish economy.

A heterodox monetary policy

President Erdogan, who, contrary to conventional economic theory, believes that high interest rates fuel inflation, has forced Turkey’s central bank in recent years to lower its key policy rate, contributing to the inflation outbreak. Recep Tayyip Erdogan has repeatedly invoked the precepts of Islam, which prohibit usury, and claims the high rates are promoted by a foreign “lobby”.

“Simsek and Erkan will be judged in turns on monetary policy, inflation and the pound,” said Timothy Ash, emerging market analyst at BlueBay. “Erkan will have to do a major cleaning in the Turkish central bank to put the + rational + thinkers back in a dominant position,” he believes.

Hafize Gaye Erkan was considered the heir apparent to longtime First Republic founder and CEO Jim Herbert, but the 40-year-old left the US bank in late December 2021 before becoming embroiled in the US banking crisis in March. .

President Erdogan’s unorthodox policies, which he continued to defend throughout the campaign for presidential and legislative elections in May, also contributed to the decline of the Turkish lira, which lost nearly 80% of its value against the dollar in five years.

On Wednesday, the Turkish currency, heavily supported by the central bank ahead of the election, fell more than 7% against the dollar and the euro.

Turkey’s central bank spent nearly $30 billion propping up the Turkish lira between January 1 and the presidential election, pushing its foreign reserves into negative territory for the first time since 2002. The institution will announce its next key interest rate on June 22.

Analysts believe a sharp increase in the key policy rate, currently steady at 8.5% since late February, could help get Turkey’s economy back on track.

(With AFP)

SS – ©2023 BFM Bourse

Leave a Comment