New Appointments to the Central Bank: A Policy Shift?

CAN BURGAZ- Discover the winds of change blowing through Turkey's economic realm as President Recep Tayyip Erdogan adopts a fresh approach following his electoral triumph in May. Over the past five years, the nation faced a storm of inflation and currency crises amidst a heterodox economic program. However, with the recent appointment of Mehmet Simsek, the former Minister of Economy, and Hafize Gaye Erkan's arrival as the Central Bank's Chairman, radical shifts are expected in monetary policies. Join us as we delve into the intricacies of these new appointments and their potential implications for Turkey's economic future. Uncover the insights and debates surrounding this policy transformation, and explore what lies ahead in this evolving financial landscape.

Turkish President Recep Tayyip Erdogan has adopted a new economic approach following his election victory in May. Erdogan, who had implemented a heterodox economic program over the last five years, led the country into an inflation and currency crisis. However, with the appointment of Mehmet Simsek, the former Minister of Economy, changes are taking place in the economic policy.

The appointment of Hafize Gaye Erkan as the Chairman of the Central Bank signals potential radical changes in monetary policies. After Erdogan pressured the Central Bank to cut interest rates, the new Central Bank administration decided to increase interest rates. The recent appointments made to the Vice Presidency of the Central Bank at the end of July led to debates; some believe it reflects a genuine mentality change, while others see it as mere window dressing.

New Central Bank Leadership

Following Mehmet Simsek’s appointment as the Minister of Treasury and Finance, Hafize Gaye Erkan was named the head of the Central Bank.

Erkan began his career at Goldman Sachs in 2005, providing consultancy services to central banks and insurance companies in the USA on various financial aspects. During his 9-year tenure, he offered expertise in balance sheet management, stress testing, capital planning, risk management, and mergers and acquisitions. Later, Erkan joined First Republic Bank in 2014, where he held several key positions, including co-chairman (Co-CEO), Chairman, board member, investment director, deposit director, and risk co-director, over eight years.

Erkan's appointment has been seen as a shift in Simsek's monetary policy. Notably, the Central Bank raised interest rates from 8.50% to 15.00% on June 23 and 17.50% on July 21, abandoning Erdogan's desired low-interest policy.

Three new names were appointed to the Vice Presidency of the Central Bank shortly after. These individuals share a common trait of being less politically influenced, aligning with what Simsek refers to as rational economic policies.

Hatice Karahan served as the founding head of the Department of Economics and Finance at Istanbul Medipol University since 2015, and she became a professor in 2020. In July 2017, Karahan was appointed the President's Chief Advisor. During this time, she also served as a visiting academician in economics at Harvard University and Columbia University for two years.

Cevdet Akcay holds Ph.D. degrees from New York City University Graduate School and University Center. His research and publications focus on exchange rate determination, debt dynamics, and disinflation.

Fatih Karahan has worked as an economist in Labor and Product Market Studies within the Monetary Policy Research Unit of the New York Central Bank since 2012.

Will the Policy Change Succeed?

While some commentators welcome the new appointments at the Central Bank and the shift in policy, others remain cautious. Erdogan has a history of implementing new procedures depending on the prevailing circumstances but not necessarily sticking to them. Consequently, there are concerns that the current changes may be temporary.

Dr. Selva Demiralp, a Professor at Koç University, believes that the new administration will temporarily address the shortage of foreign exchange liquidity by attracting short-term foreign exchange inflows. She also expects the new team, comprising three academic and research-oriented members, to revitalize the neglected research unit at the Central Bank, foster staff cohesion, and revive conferences and research activities.

According to journalist Fatih Altaylı, these appointments suggest increasing Simsek's influence. Despite criticism from a faction within the AK Party and individuals close to the Palace, both Mehmet Şimşek and Gaye Erkan have been consolidating their power in recent weeks. This indicates a decline in the influence of certain groups, allowing a return to more pragmatic economic management.

According to the Financial Times, investors have reacted positively to the economic changes since Erdogan extended his leadership for a third decade, as evidenced by the declining price of credit default swaps for Turkish debt.

Economist Umit Akcay believes that the new administration may bring about little changes. He believes the newly appointed experts cannot steer the government away from its already established course. Instead, these appointments may better implement the Erdogan administration's decided path and help broaden the AKP's legitimacy, gaining public acceptance for potential austerity policies.

Economist Timothy Ash regards the appointments positively. He highlights that the departure of three vice presidents, including Emrah Sener, known for implementing unconventional monetary policies to align with Erdogan's views, is equally important.

Overall, the new appointments and policy changes at the Central Bank have elicited various reactions and expectations from commentators and experts. Only time will reveal the actual effectiveness and longevity of these adjustments in Turkey's economic landscape.