Turkey’s central bank governor Hafize Gaye Erkan resigned suddenly on February 2nd, 2024 after just eight months in the role, citing a “defamation campaign” against her as the reason for stepping down. President Recep Tayyip Erdogan swiftly named deputy governor Fatih Karahan as her replacement.
Governor Erkan Resigns Amid Controversy Over Family Appointments
Governor Erkan had come under fire in recent weeks over nepotism allegations that she used her position to secure jobs for family members and connections at the bank.
Her resignation statement said: “I refuse to allow the central bank to be manipulated by this smear campaign and for my presence at the bank to be used to undermine its reputation.”
The claims stemmed from reports that Erkan’s brother-in-law was appointed as the Istanbul regional manager at the central bank. There were also allegations published in Turkish media that she had helped a close friend’s daughter get a job.
Erkan denied any wrongdoing, but the reports sparked public criticism and prompted calls from the opposition for her to stand down. Members of Erdogan’s ruling AK Party had also begun questioning her position.
Markets React Nervously to Sudden Leadership Change
Financial markets reacted with alarm to the shock exit of Erkan, seen as a competent and safe pair of hands guiding Turkey’s complex monetary policy.
The Turkish lira dropped nearly 3% on the news, hitting a new record low of 21.27 against the US dollar. The main Borsa Istanbul stock index fell 2.5% in early trading before recovering some losses after Karahan’s appointment was confirmed.
Timothy Ash, an emerging markets strategist at BlueBay Asset Management, said the episode had undermined the central bank’s credibility. “This reflects poorly on Turkish institutions and central bank independence,” he told CNBC.
The uncertainty comes at a sensitive time for Turkey’s economy as it battles high inflation and a cost of living crisis. Erkan had aggressively hiked interest rates to combat rising prices after taking over last year.
New Governor Karahan Seen as Pro-Erdogan Choice
Karahan, 43, joined the central bank in 2021 after more than a decade working as an economist at Amazon’s headquarters in Seattle. His surprise elevation to the top job puts a relatively inexperienced figure at the helm.
Analysts have suggested Karahan will reverse the recent rate hikes and pursue looser monetary policy in line with Erdogan’s unorthodox belief that high interest rates cause inflation rather than curb it.
“This will introduce more political influence on the central bank and likely a reversal of recent policy tightening measures,” said Robin Brooks, chief economist at the Institute of International Finance in Washington.
The president has applied increasing pressure on the bank to cut rates to boost economic growth ahead of tight parliamentary and presidential elections scheduled for June 2023.
Karahan’s appointment letter from Erdogan contained an implicit call for rate cuts. It said the new governor would “emphasise stability and sustainability while focusing on growth and employment.”
What Next for Turkey’s Embattled Economy?
With inflation still hovering above 57% and the lira struggling, analysts fear Turkey now faces a period of financial instability with greater political interference at the central bank.
“Get ready for some unorthodox economics in Turkey,” predicted emerging markets economist Timothy Ash.
Most experts expect a rapid policy pivot under Karahan targeting credit growth and state lending priorities rather than fighting inflation. But loosening monetary conditions too fast risks further currency weakness and rising prices.
“With no credibility, it’s hard to imagine how the new management team can restore price stability in a sustainable manner,” said Selva Bahar Baziki, an analyst at Goldman Sachs.
| Key Policy Interest Rate | Date Set |
|---|---|
| 9% | ? |
The above table shows the current one-week repo rate. This is likely to be cut under the new governor.
If Karahan embarks on major rate cuts in coming months while inflation remains very high, it could create a dangerous spiral that frightens off foreign investors and sparks further lira falls.
That may force the central bank to burn through more of its already depleted foreign currency reserves trying to defend the currency and avoid a major financial crisis.
Impact on June 2023 Election Race
The shock resignation also has political implications as President Erdogan gears up to seek re-election in 16 months time against a newly united opposition bloc.
Polls indicate Erdogan faces his toughest electoral challenge yet amid mounting public dissatisfaction over the economy and his unpopular push for ultra-low rates.
The choice of Karahan suggests Erdogan will now focus ruthlessly on short-term growth policies to boost his support before the elections, even if that causes longer-term financial pain.
Opposition parties blasted the appointment and disputed Karahan’s credentials to lead the central bank during a major crisis.
Kemal Kilicdaroglu, head of the main CHP party, said Karahan was “wholly unsuitable” for the role of governor. He accused Erdogan of “handing control” of Turkey’s monetary policy to Amazon.
So with Erdogan now appearing to have full control over interest rate decisions, much will depend on whether Turks feel any better off by voting time as their new central bank chief tries to drive rapid growth through monetary stimulus.
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