Erdogan names Hafize Gaye Erkan to head Turkey central bank, policy pivot expected

President Tayyip Erdogan on Friday appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey’s central bank, which is widely expected to reverse course and tighten policy after years of rate cuts and a simmering cost-of-living crisis.

Erkan, former co-CEO at First Republic Bank and managing director at Goldman Sachs, takes the reins after Erdogan’s re-election and just under a week after he signalled a pivot away from unorthodoxy with a new cabinet.

The central bank’s first woman governor, Erkan is also its fifth chief in four years, underlining the challenge she may face delivering a lasting policy turnaround after Erdogan has all but stamped out the bank’s independence in recent years.

The 43-year-old replaces Sahap Kavcioglu, who spearheaded Erdogan’s rate-cutting drive that set off a historic currency crash in 2021 and sent inflation to a 24-year peak 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, which raised concerns among some investors that trappings of Erdogan’s unorthodoxy will remain.

The main question for Erkan will be “whether she will be granted independence to steer monetary policy towards ‘rational policies’,” said Selva Demiralp, economics professor at Koc University and a former U.S. Federal Reserve economist.

“In order to gain credibility and anchor market expectations with the minimum dose of rate hikes, she has to ensure that the preference towards low interest rate policies…are buried in the past and won’t haunt her.”

Erkan’s leanings are unclear given she has no formal monetary policy experience in her career spanning Wall Street and U.S. corporate boardrooms. She has a Ph.D. from Princeton University in financial engineering.

She was at First Republic from 2014-2021, according to her LinkedIn profile. This year, the bank became the largest in the U.S. to fail since 2008 after it was seized by regulators and sold to JPMorgan.

Analysts now expect Turkey’s central bank to hike interest rates to between 20% and 25% from 8.5% as soon as this month.

Such a U-turn on the economy would come as many analysts anticipate turmoil given depleted foreign reserves, unchecked inflation and wide current account deficits.

ORTHODOX FINANCE MINISTER

Erdogan, a self-proclaimed “enemy” of interest rates, has pressed the central bank to deliver stimulus in recent years and has been quick to replace its governor. He has also embraced orthodoxy before, only to quickly double back.

The central bank slashed its policy rate to 8.5% from 19% in 2021, leaving real rates deeply negative and the lira largely managed by dozens of regulations covering credit and foreign exchange.

Yet after Erdogan survived his toughest political test in the May 28 runoff vote, he on Saturday named Mehmet Simsek, a well-respected and orthodox former finance minister, as minister in charge of the economy.

Simsek met Erkan earlier this week ahead of her appointment.

Amid record low foreign reserves of -$5.7 billion, the lira TRYTOM=D3 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 said 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.

But the last central bank governor to raise rates, Naci Agbal, was fired in 2021 after less than five months on the job.

“It is unclear for how long Erdogan may tolerate a more pragmatic stance on the economic front,” said Wolfango Piccoli of Teneo. “Kavcioglu’s nomination…signals that Erdonomics is still alive and can bite back at any time,” he added.

Erkan is on Marsh McLennan’s board and was named CEO at Greystone, a real estate finance and investment firm, last year.

During her career in New York City, she gained a reputation as “tough, smart, and effective,” said Kathryn Wylde, CEO of the Partnership for New York City nonprofit, where Erkan once served as a director.

“She is certainly not someone who can be pushed around, but she also can disagree without being disagreeable,” Wylde said.