Turkish President Recep Tayyip Erdogan appointed a former U.S.-based bank executive to head the central bank Friday, sending the strongest signal yet that the newly reelected leader might pivot from his unusual economic policies that many blame for worsening a cost-of-living crisis.
Hafize Gaye Erkan, 41, is Princeton-educated and will become the first woman to lead the Turkish central bank. She briefly served in 2021 as co-chief executive of First Republic Bank, which last month became the second-largest U.S. bank to fail as its wealthy clients pulled their money during wider turmoil in the sector.
Her nomination follows last week’s appointment of Mehmet Simsek, an internationally respected former banker, as treasury and finance minister. He was a former finance and deputy prime minister under Erdogan and returned after a five-year break from politics.
The choices for two key financial roles have raised hopes that Erdogan, reelected last month to a third term, will move away from his insistence that lower interest rates will fight Turkey’s staggering inflation. The rate peaked at 85% in October, and people are struggling to afford food, housing and other necessities.
Critics blame the cost-of-living crisis on Erdogan’s unorthodox approach, which runs contrary to conventional economic thinking — that raising rates will combat inflation. Central banks from the U.S. Federal Reserve, European Central Bank and others worldwide are hiking borrowing costs to bring down spikes in consumer prices.
Erkan’s appointment “is an important step toward more credible economic policies and provides encouragement that President Erdogan will loosen his grip on the central bank,” said Liam Peach, senior emerging markets economist at Capital Economics.
“Recent policy appointments will now need to turn into policy action for investors to be confident that this shift towards orthodoxy is the real deal,” he said.
The next steps are critical as the economy struggles with a crashing currency and inflation at a still-high 39.5%. The central bank will meet later this month to decide on interest rates — a key indicator of the course Turkey’s economy will take.
In recent years, Erdogan has fired three central bank governors for failing to fall in line with his rate-cutting policies.
“Erkan needs to be given the freedom to raise interest rates sharply,” Peach said. “A large interest rate hike from 8.5% to 20% or so would send a very strong signal that this is a credible policy shift.”
She also will have to show that it’s important to keep rates high to ease inflation. While higher borrowing costs are designed to fight inflation, they can slow economic growth as loans become more expensive.
It could be another pain point for households and businesses that have seen food and energy costs soar following Russia’s invasion of Ukraine and their currency hit record lows against the U.S. dollar.
Erkan was a managing director at the Goldman Sachs investment banking company and worked at San Francisco-based First Republic Bank, holding the post of co-CEO for six months in 2021. JPMorgan Chase took over the failed bank after U.S. regulators seized it in May.
She replaces Sahap Kavcioglu who oversaw a series of rate cuts since 2021. Kavcioglu now becomes head of Turkey’s banking watchdog, called BBDK.
“Appointing Kavcioglu — a cheerleader of Erdogan’s ‘new economic model’ — as head of the banking regulator is a powerful reminder that Erdonomics can bite back anytime,” said Wolfango Piccoli, co-president of the London-based risk consultancy Teneo.
Erkan will have to rebuild the central bank “after years of mismanagement, purges, and demotions,” Piccoli wrote in a note.
“Like most other key institutions, the (central bank) has lost its independence and has been hollowed out by Erdogan’s drive to centralize power, with key jobs given to loyalists and cronies,” he said.