Erdogan names Erkan to head Turkey central bank, policy pivot expected (updated)

First Republic Bank

08/06/2023 23:42

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      President has signalled pivot to more orthodox policy
    

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      Erkan expected to tighten policy after rate-cutting drive
    

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      Lira at record lows, forex reserves depleted
    

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      First woman governor, and fifth chief in four years
    

  
 (Adds economist comment on Erkan's prospects, context of first
woman cenbank chief, rate hike expectations)
    By Daren Butler and Jonathan Spicer
       ISTANBUL, June 9 (Reuters) - 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.

 (Additional reporting by Ali Kucukgocment; Writing by Jonathan
Spicer and Daren Butler; Editing by Cynthia Osterman and Hugh
Lawson)
 ((daren.butler@tr.com; +90-212-350 7053; Reuters Messaging:
daren.butler.thomsonreuters.com@reuters.net))