Erdogan names Erkan as head of Central Bank, signalling a policy shift

President Tayyip Erdogan on Friday appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey's central bank as it prepares to change course and tighten policy after years of interest rate cuts and a simmering cost-of-living crisis.

Erkan, a former co-CEO of First Republic Bank and managing director at Goldman Sachs, takes office after Erdogan's reelection on May 28 and less than a week after he signaled a departure from unorthodoxy with a new cabinet.

The announcement, made through a decree in the Official Gazette, completes a makeover of Erdogan’s top economic team after Mehmet Simsek’s appointment as treasury and finance minister.

Erkan becomes the fifth central bank chief in four years, replacing Sahap Kavcioglu, who played a leading role in Erdogan's strategy of rate cuts that contributed to a historic currency crash in 2021. Inflation soared to a 24-year high of over 85% last year.

Simultaneous to the announcement of Erkan's appointment, it was revealed that Kavcioglu would take over as the head of Turkey's BDDK banking watchdog.

Erkan's background and views on monetary policy remain unclear, as she does not have any formal experience in this area throughout her career in Wall Street and U.S. corporate boardrooms. However, she holds a Ph.D. in financial engineering from Princeton University. Her professional tenure at First Republic Bank lasted from 2014 to 2021, according to her LinkedIn profile. Notably, the bank faced significant challenges this year, resulting in its seizure by regulators and subsequent sale to JPMorgan, making it the largest U.S. bank to fail since the 2008 financial crisis.

Under Erdogan's leadership, Turkey's central bank has seen its independence greatly diminished in recent years. Erdogan, who has openly expressed his aversion to interest rates, has consistently pushed for stimulus measures and frequently replaced governors. This policy approach led to a sharp reduction in the policy rate from 19% to 8.5% in 2021, leaving real interest rates deeply negative. The management of the lira has largely relied on numerous regulations governing credit and foreign exchange.

However, following Erdogan's successful political test in the May 28 runoff vote, he appointed Mehmet Simsek, a well-respected and orthodox former finance minister, as the minister in charge of the economy. This move was made amidst concerns about record-low foreign reserves of -$5.7 billion. The lira has plummeted to all-time lows this week, experiencing a 7.2% drop on Wednesday. Following Erkan's appointment, the lira was trading at 23.5010 against the dollar.