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Recent Developments in Turkey’s Central Bank Leadership and their Implications for Economic Policy

5th February, 2024| By Business Desk
Turkey Central Bank
Turkey Central Bank | Credit: Creative Commons
  • Hafize Gaye Erkan resigns as Turkey’s central bank leader amid nepotism allegations, marking the fifth leadership change in five years.
  • Deputy Governor Fatih Karahan appointed, signaling a commitment to maintaining higher interest rates.
  • Erkan’s departure linked to doubts about her leadership, exacerbated by media scrutiny.
  • Previous leadership changes led to reversals in inflation control efforts, but Karahan’s appointment suggests policy continuity.
  • Turkey faces economic challenges, with upcoming elections and high inflation, requiring a delicate balance in economic policy decisions.

Turkey has witnessed a significant event in its economic landscape as Hafize Gaye Erkan, the first woman to hold the position of central bank leader, resigned after just eight months in office. This marks the fifth change in leadership within as many years, raising questions about the stability and direction of Turkey’s economic policies. The departure of Erkan has led to the appointment of Deputy Governor Fatih Karahan as her successor, hinting at the country’s commitment to maintaining higher interest rates. This article explores the reasons behind the leadership change, its potential impact on economic policies, and the background of the new central bank governor.

Hafize Gaye Erkan’s resignation was prompted by allegations of nepotism, with media reports highlighting her father’s alleged undue influence in the central bank’s Istanbul office. Despite President Recep Tayyip Erdogan voicing support for Erkan and denouncing what he termed “unreasonable rumors,” critics continued to question her leadership. A magazine interview, where Erkan mentioned her family’s move due to high living costs, further fueled skepticism about her ability to navigate the economic challenges facing Turkey.

The central bank leadership change comes at a critical juncture for Turkey’s economic policies. Previous shifts in leadership have witnessed a reversal of efforts to control inflation through interest rate hikes. However, the recent appointment of Deputy Governor Fatih Karahan, a member of Finance Minister Mehmet Simsek’s team, suggests a commitment to maintaining higher interest rates. This stands in contrast to Erdogan’s unconventional stance of keeping rates low to combat inflation. The decision to raise interest rates from 8.5% in June to 45% last month has been well-received by foreign investors, indicating a shift towards a more orthodox economic approach.

Fatih Karahan, the newly appointed central bank governor, shares similarities with his predecessors Erkan and Simsek in terms of experience in the U.S. Karahan, in his early 40s, completed his master’s and doctorate in economics at the University of Pennsylvania before a decade-long tenure at the Federal Reserve Bank of New York, starting in 2012. His experience also includes a role as chief economist at Amazon, alongside part-time lecturing at Columbia and New York universities. This background positions him as a seasoned economist with exposure to both academic and practical facets of the field.

Following Karahan’s appointment, Finance Minister Simsek expressed commitment to supporting the disinflation process and restoring fiscal discipline. The upcoming local elections in March pose a potential challenge for Erdogan, who seeks to regain major cities lost to the opposition in 2019. A poor electoral outcome may influence Erdogan’s resolve to stick with Simsek’s “rational” economic approach. Analysts debate the likelihood of a further rate hike later this month, with some arguing its necessity to reinforce the central bank’s commitment to tackling inflation. However, others, like Can Selcuki of Istanbul Economy Research, believe that as long as Simsek remains in position, the current policy is unlikely to undergo significant changes.

The recent change in Turkey’s central bank leadership raises questions about the nation’s economic trajectory. Hafize Gaye Erkan’s resignation amid allegations and subsequent replacement by Fatih Karahan signals a potential commitment to maintaining higher interest rates. The evolving economic landscape, shaped by geopolitical factors and domestic challenges, will be closely watched by investors and policymakers alike. As Turkey navigates these changes, the role of key figures such as Finance Minister Simsek and the new central bank governor will play a crucial role in determining the effectiveness and sustainability of economic policies.