Turkey’s central bank underwent a sudden leadership change this week after governor Hafize Gaye Erkan abruptly resigned on Thursday, citing a “defamation campaign” against her. Erkan was swiftly replaced by deputy governor Fatih Karahan, a former economist at Amazon. The high-level personnel shift has raised questions about the future direction of Turkish monetary policy amid persistently high inflation.
Governor Erkan Resigns After Less Than a Year on the Job
Hafize Gaye Erkan was appointed central bank governor just last March and embarked on an aggressive series of interest rate hikes to tame Turkey’s runaway inflation. However, after less than 12 months in the role, Erkan resigned without warning, saying she could “no longer bear the defamation campaign” targeting her family and relatives.
While Erkan did not elaborate on the nature of the alleged smear campaign, her shock departure was likely tied to recent nepotism allegations involving her husband. Critics accused Erkan’s spouse of profiting from insider central bank information, claims which the bank strongly denied but which nevertheless dominated Turkish headlines for weeks.
The controversy not only tarnished Erkan’s reputation but also cast doubt on the central bank’s credibility. Ultimately, the unrelenting media scrutiny appears to have driven Erkan from her position. Her abrupt resignation letter took Turkish markets by surprise and sent the lira tumbling nearly 3% against the dollar.
Deputy Governor Karahan Named as Replacement
Within hours of Erkan submitting her resignation, Turkish President Recep Tayyip Erdogan appointed deputy governor Fatih Karahan to succeed her as the new central bank chief.
Karahan has served as a deputy governor since 2021 after a long stint as senior economist for emerging markets at Amazon. While his rapid promotion took many observers off-guard, Karahan does boast an impressive resume spanning both the public and private sectors.
As an executive at Amazon, Karahan built econometric models to guide investment decisions across developing countries. Before that, he worked his way up through the ranks of Turkey’s finance ministry after obtaining economics degrees from Turkish and American universities.
At just 43 years old, Karahan assumes control of Turkish monetary policy during a particularly turbulent period. Markets are anxiously watching to see whether he will stay the course with Erkan’s tight stance or bend to political pressure for looser credit.
New Governor Affirms Commitment to Tight Policy
Seeking to ease concerns about the central bank’s direction, Karahan publicly declared he would not bow to calls to prematurely slash interest rates. He stated, “The current tight monetary policy approach will be maintained until the inflation outlook displayed a permanent improvement beyond any doubt.”
Karahan’s remarks strongly echoed governor Erkan’s frequent assertions that rates would only fall after inflation slowed to the official 5% target. Over the past year, Erkan jacked up the benchmark policy rate from 19% to 28% in an effort to constrain inflation that peaked above 85% in October.
While inflation has since moderated to around 57%, it remains painfully high for Turkish households and well above targets. Karahan conceded the central bank has “significant ground to cover” in restoring price stability. But he expressed confidence that maintaining elevated interest rates would eventually pay dividends.
The new governor’s orthodox statements affirming the tight monetary course have – at least temporarily – buoyed market sentiment. The lira posted modest gains versus the dollar after his introduction while stocks rose nearly 1%.
Intensifying Political Pressure on Central Bank
However, Karahan takes the helm at a time when central bank independence is increasingly under threat in Turkey. President Erdogan openly adheres to the unorthodox view that high interest rates cause inflation rather than curb it. He has repeatedly called for rate cuts despite opposition from mainstream economists.
Over the past year, Erdogan has ramped up political pressure on the nominally independent central bank while purging senior bureaucrats deemed insufficiently loyal. Just last month, he sacked the statistics chief when official data showed prices rising more than expected.
Against this backdrop, Karahan may struggle to establish the credibility and autonomy required to genuinely tackle Turkey’s economic woes. There is a real risk that monetary policy becomes subservient to political prerogatives under the new leadership.
If rate cuts commence prematurely before inflation is durably cooled, it would likely unleash even faster price increases and further batter Turkish living standards. Safeguarding central bank independence thus remains a pivotal challenge in preventing a full-blown economic crisis.
Outlook Hinges on Political Interference
Ultimately, experts say Turkey’s inflation-ridden economy can still be stabilized if prudent monetary policy holds sway over partisan concerns. Tight credit and budget discipline are essential to facilitate the required adjustment.
However, the central bank’s record of buckling under political pressure does not bode well for the economy’s outlook. Karahan’s pledges to stay the course will soon be put to the test. Most analysts expect interest rates to begin falling by mid-2024 due to election season political exigencies.
But with inflation still exorbitantly high and the lira historically weak, premature loosening could set the stage for even worse macro instability ahead. The capacity of Turkey’s freshly minted central bank governor to withstand likely interference from Erdogan may prove decisive to the country’s economic fate.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
