Turkey’s central bank rocked by another leadership shake-up

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Turkish central bank chief Hafize Gaye Erkan has quit just months into her tenure and been replaced by a deputy, the latest leadership shake-up at one of the country’s foremost economic institutions.

Erkan, who was appointed as the central bank’s first female governor in June and has since increased interest rates significantly, said she resigned as the result of a smear campaign against her. But for local and foreign investors, the saga has brought back memories of other late-night putsches against well-regarded central bank leaders.

Who will replace Erkan as central bank chief?

President Recep Tayyip Erdoğan appointed deputy central bank governor Fatih Karahan to replace Erkan late on Friday. He is Erdoğan’s sixth central bank governor since 2019.

Karahan, who joined the central bank in July, is a well-known figure among the economics community in Turkey. He is widely seen as one of the driving forces behind a big pivot towards more conventional monetary policy that kicked off after Erkan’s appointment.

The University of Pennsylvania-educated economist worked for nearly a decade at the New York Federal Reserve and later joined ecommerce group Amazon before his appointment at the Turkish central bank.

Karahan’s published work and professional experience has broadly focused on macroeconomics and labour markets. His experience contrasts with Erkan, a former Goldman Sachs banker, who specialised in developing complex risk management models for banks.

“I know him as an . . . expert who is respected by the employees of the institution,” Hakan Kara, a former Turkish central bank chief economist, said of Karahan. One local banker added Karahan is a “credible” choice to lead the bank.

What was Erkan’s role in Turkey’s economic overhaul?

Erdoğan, Turkey’s leader of the past two decades, abruptly changed course on economic policy after his re-election in May. He abandoned unconventional policies that had fuelled a prolonged inflation crisis and by spring 2023 ignited serious concerns that Turkey was headed for a balance of payments crisis or capital controls.

The president appointed Mehmet Şimşek as finance minister, a former Merrill Lynch bond strategist who had served years earlier as deputy prime minister, in June to lead the economic turnaround. Erkan’s appointment days later helped bolster expectations that Erdoğan was serious about the overhaul.

The central bank under Erkan’s leadership has boosted interest rates from 8.5 per cent to 45 per cent. It has also taken a series of other steps aimed at cooling rampant inflation and financing growth, while encouraging locals to hold liras rather than stashing their savings in dollars and gold.

The bank’s foreign currency war chest, which was depleted in recent years in an unsuccessful attempt to prop up the lira, was also rebuilt during Erkan’s tenure. Gross foreign currency reserves were $85bn at the end of 2023, up from $48bn in May, according to central bank data.

What does this mean for investors?

Foreign investors have been slowly warming to Turkish assets in recent months after largely abandoning the country’s markets over the past decade because of Erdoğan’s unorthodox policies.

Pimco, one of the world’s biggest bond managers, told the Financial Times last month it had started buying lira-denominated debt and that Turkey could even regain its investment-grade credit ratings in the next five years.

One of investors’ most persistent fears, however, has been the risk of another “Ağbal incident”, a reference to 2021 when Erdoğan sacked well-respected central bank governor Naci Ağbal for raising interest rates.

The initial reaction from local and foreign analysts is that Erkan’s exit is not a repeat of Ağbal’s dismissal.

A senior economic official said that Şimşek was provided the latitude to nominate a governor who shared his convictions on the restoration of conventional economic policies.

“Our president has full support and confidence in our economic team and the programme we are implementing,” Şimşek said on Friday.

Fatih Akcelik, Turkey economist at JPMorgan, told clients, “while sudden leadership changes bring discomfort for investors, we see the new [central bank] governor as positive for disinflation and lira”.

He added that Karahan would probably be more hawkish on interest rates than Erkan had been since he was part of a trio of central bank deputy governors who were thought to have agitated strongly for large rate rises.

Akcelik added that a “dovish tilt” at last week’s central bank meeting, in which the policy-setting committee signalled it was unlikely to raise rates again, will probably be reversed.

What prompted Erkan’s exit?

Rumours have been swirling around Turkey’s economics community for the past several weeks after a former employee claimed in a local news report that Erkan’s father held an unofficial role at the central bank and had sacked her.

Politicians in Turkey’s opposition political parties latched on to the drama, with one MP demanding in January that Şimşek answer questions related to the allegations.

Erkan dismissed the claims as “unfounded” and “completely unacceptable”.

Erdoğan appeared to back Erkan as recently as last week, when he said unnamed assailants were “conducting campaigns to disrupt the climate of confidence and stability that we have achieved with great difficulty in the economy with unreasonable rumours”.

Erkan said she had quit for personal reasons: “A major character assassination campaign has been organised against me recently,” Erkan said, adding that she had stepped down “to prevent my family and, moreover, my sinless child . . . from being further affected by this process”.

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