ISTANBUL (AP) — Turkey has experienced yet another change in leadership at its central bank, marking the fifth departure in as many years. Hafize Gaye Erkan, the first woman to hold the top position, announced her resignation after just eight months on the job. Her departure comes amid allegations of nepotism that recently surfaced in the local media. Erkan, a former senior executive at Goldman Sachs, vehemently denied these accusations, attributing them to a 'major reputation assassination campaign.'
In the past, President Recep Tayyip Erdogan has dismissed central bank governors who refused to adhere to his unconventional belief in keeping interest rates low to combat inflation. However, Erkan's resignation appears to be motivated by external pressure rather than presidential intervention. Her replacement, Deputy Governor Fatih Karahan, suggests that Turkey will continue with higher interest rates, a strategy overseen by Finance Minister Mehmet Simsek.
This shakeup in the central bank leadership comes as Turkey grapples with a struggling economy. Erdogan's unorthodox policies, which favored low interest rates, have been blamed for triggering a currency crisis and driving up the cost of living, making it increasingly difficult for households to afford basic necessities.
Erkan's resignation follows weeks of media speculation surrounding her father's alleged undue influence in the central bank's Istanbul office. Although Erkan received some support from Erdogan, who denounced the 'unreasonable rumors' undermining Turkey's economic progress, critics continued to question her leadership. One particular magazine interview garnered attention, in which she mentioned her family moving in with her parents due to the high prices of renting a home in Istanbul.
The frequent changes in central bank leadership have seen Erdogan retract efforts to control inflation through interest rate hikes in the past. However, after the parliamentary and presidential elections in May, Simsek and Erkan were appointed with the aim of addressing the country's economic challenges through increased borrowing costs. Interest rates have surged from 8.5% in June to 45% in the past month, a move that has been well-received by foreign investors who had previously turned away from Turkey.
Despite these substantial rate hikes, inflation remains alarmingly high. Recent figures released on Monday show that consumer prices rose to a staggering 64.86% in January compared to the previous year, up from 64.77% in December. With the appointment of Karahan, who is also a member of Finance Minister Simsek's team, it appears that there will be no reversal of the current economic policy this time.
Karahan, like Erkan and Simsek, has extensive experience working in the United States. He joined the central bank as deputy head when Simsek assumed the position of finance minister and Erkan took over as the central bank's leader. In his early 40s, Karahan obtained his master's degree and doctorate in economics from the University of Pennsylvania before embarking on a 10-year career at the Federal Reserve Bank of New York in 2012. Subsequently, he served as the chief economist at Amazon while working as a part-time lecturer at Columbia and New York universities.
In light of Karahan's appointment, Simsek expressed his commitment to restoring fiscal discipline and supporting the disinflation process in Turkey's economy. He further emphasized President Erdogan's unwavering support and confidence in their economic team and the program they are implementing.
Turkey is approaching local elections in March, during which Erdogan will attempt to regain control of several major cities, including Ankara and Istanbul, which were won by the opposition in 2019. The outcome of these elections could potentially influence Erdogan's decision to stick with Simsek and his 'rational' approach.
Liam Peach, senior emerging markets economist at Capital Economics, argues that a further rate hike later this month would strengthen the central bank's commitment to tackling inflation and enhance Karahan's credibility. However, Can Selcuki, managing partner at Istanbul Economy Research, believes that another rate hike is unlikely, despite Turkey's ongoing economic struggles. Selcuki suggests that Simsek is the key figure driving the current policy direction, indicating that as long as he remains in his position, the policy is unlikely to change.
Turkey's economy continues to face significant challenges, and it remains to be seen how the new central bank leadership will navigate these turbulent waters. The country's monetary policy, interest rates, and inflation levels will play a crucial role in determining Turkey's economic trajectory in the coming months.
