Turkish President Recep Tayyip Erdogan named former US-based banking executive Hafize Gaye Erkan as his new monetary chief, a move that may mark the end of ultra-low interest rates and constant government interventions to prop up the lira.
(Bloomberg) — Turkish President Recep Tayyip Erdogan named former US-based banking executive Hafize Gaye Erkan as his new monetary chief, a move that may mark the end of ultra-low interest rates and constant government interventions to prop up the lira.
The announcement, made just after 1:00 am local time on Friday, completes a makeover of Erdogan’s top economic team after he was re-elected last month to extend his two decades in power.
It follows ex-Merrill Lynch bond strategist Mehmet Simsek’s appointment as treasury and finance minister. Erkan, in her 40s, is Turkey’s first female central bank governor. She worked at Goldman Sachs Group Inc. for almost a decade and was co-chief executive officer of San Francisco-based First Republic Bank until about 18 months before its collapse in May.
The lira fell around 1.6% to a fresh low of 23.5 against the dollar in early trading on Friday, continuing its slide this month with state banks reining in efforts to bolster it. Turkish stocks rose.
Erkan, who lived in the US for more than two decades, replaces Sahap Kavcioglu. He served for just over two years and firmly backed Erdogan’s belief that lowering interest rates was the best way to combat inflation.
The unorthodox economic policies have caused a cost-of-living crisis and led to foreign investors to pulling billions of dollars out of Turkish bond and stock markets in recent years. Inflation hit almost 90% last year. While it’s decelerated, it’s still around 40%.
Erkan’s ability to slow price rises and bring back portfolio investors will depend in large part on how much autonomy Erdogan — a self-described “enemy” of high interest rates — gives her. He’s fired previous governors for tightening monetary policy too much and as recently as May 19 said that interest rates would come down further.
Investors will be watching for a big rate hike at the central bank’s next meeting on June 22. JPMorgan Chase & Co. and Barclays Plc expect the base rate to be increased by 16.5 percentage points to 25%. JPMorgan says the bank may opt to make the move even earlier.
“Erkan’s appointment hopefully marks an improvement over the policies of her predecessor,” said Nick Stadtmiller, head of product at Medley Global Advisors. “The lingering question is whether Erdogan will allow the central bank to raise rates sufficiently to bring down inflation.”
Bloomberg Economics doubts there will be an emergency meeting before late June, but expects the central bank to put out a statement before then underscoring its commitment to price stability and hinting at a lift in rates.
“That would lend a hand to the lira,” said Selva Bahar Baziki of Bloomberg Economics.
Despite the state interventions, the lira is down more than 20% this year. It’s the worst performer among major emerging currencies after Argentina’s peso.
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.
Before installing Kavcioglu as governor in March 2021, Erdogan ousted his three predecessors in quick succession.
Under Kavcioglu, the central bank slashed the benchmark to 8.5% from 19%, despite prices spiraling higher.
He will now become the new head of Turkey’s banking regulator, taking over an institution that’s had a crucial role in implementing central bank decisions including policies to channel loans to favored industries.
“I remain cautious that monetary and economic policy will shift to a more investor-friendly direction as Erdogan remains in the driver’s seat,” said Brendan McKenna, strategist at Wells Fargo & Co. in New York.
–With assistance from Karl Lester M. Yap, Tom Redmond, Patrick Sykes and Asli Kandemir.
(Updates throughout.)
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