The term of office of the highly praised Hafize Gaye Erkan, the first woman to head the Turkish central bank, has already come to an end. The US-educated economist resigned! The reason she cited was a campaign against her and her family from which she wanted to protect them. Shortly afterwards, President Erdogan appointed Erkan’s deputy Fatih Karahan as her successor.
Erkan’s departure is the fifth change in five years at the head of the Turkish National Bank. This mainly has to do with President Erdogan and his unconventional monetary policy ideas. Influenced by the Islamic concept of sin and fixated on growth at any price, Erdogan is a declared opponent of high interest rates. In recent years, the Turkish president has deprived the monetary authority of its independence and installed at its top compliant followers who implemented his low interest rate policy without objection. If the pressure becomes too great because the lira price plummets and international investors withdraw their trust in a country that is actually blessed with great potential, conventional economists can take over and pursue a more rational course.
Last May, after Erdogan’s victory, he decided to try rationality again. A new team, including Erkan, has returned the country to monetary policy orthodoxy. Under its first boss, the central bank increased key interest rates in several steps from 8.5 to 45 percent. This means that inflation has not yet been tamed; in the beginning of 2024, it was almost 65 percent, and the lira continues to lose value. Nevertheless, after the upheavals of the last few years, there are signs of stabilization. Investor confidence is also gradually returning.
The market’s concern was always that, given the inevitable loss of growth that would accompany this course, Erdogan would at some point lose patience and order another U-turn. Erkan’s predecessor was fired in 2021 for exactly this reason after just four months in office.
But this time things are different. Erkan had to leave not because of her monetary policy, but because of allegations of nepotism and other misdeeds. Reports had surfaced that her father was in and out of the central bank, issuing instructions without official authority. One employee even complained that he had beaten her. The head of the central bank had already made headlines when she announced that she and her family would be living with her parents again because of the high housing costs in Istanbul. The attempt to be closer to the people was not convincing given the former Goldman Sachs banker’s millions of assets. How justified the accusations of nepotism are remains unclear – as does the question of why a central bank head believes she has to ingratiate herself publicly. It is undisputed that Erkan had influential opponents.
What is more important for Turkey, however, is that the recent personnel change at the central bank is for once not accompanied by a change in policy. Erkan’s successor Karahan has explicitly committed himself to the goal of price stability in his previous statements. The economist, who, like his predecessor, worked in the US for a long time, also stands for conventional economic policy. President Erdogan is therefore sticking to the course of monetary policy stabilization for the time being. However, the question of how long this is valid remains. Because as long as all the threads come together in the presidential palace when it comes to economic policy issues, every Turkish central bank governor will be in an ejector seat.
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