Turkey shakes up central bank as part of shift to mainstream approach

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Turkish president Recep Tayyip Erdoğan has shaken up the central bank’s policy-setting board with the appointment of three new deputy governors, including a former New York Federal Reserve official, as part of a shift to a more mainstream economic approach.

The move comes a day after central bank governor Hafize Gaye Erkan, a former Wall Street banker who was appointed in June, acknowledged that Turkey’s economy was overheating and that inflation would probably reach almost 60 per cent by year-end, from 38 per cent last month.

Erdoğan has overhauled the country’s economic management following his re-election in May after years of unorthodox policies. These included a huge pre-election spending spree that is blamed for stoking runaway inflation, depleting the country’s foreign policy war chest and threatening to set off a balance of payments crisis.

Erkan has more than doubled interest rates during her two months in charge of the central bank. New finance minster Mehmet Şimşek, a former Merrill Lynch bond strategist, has also allowed the lira to depreciate sharply against the dollar by easing up on a costly defence of the currency. He has also boosted taxes to cool consumer spending and refill government coffers.

Osman Cevdet Akçay, Fatih Karahan and Hatice Karahan have been appointed deputy central bank governors, according to an announcement in Turkey’s official gazette. They replace Emrah Şener, who had been on the board since 2016, and Taha Çakmak and Mustafa Duman, who were appointed in 2021.

Akcay was previously a senior economist at Yapı Kredi, one of Turkey’s biggest banks, while Fatih Karahan has worked at the New York Fed and ecommerce group Amazon, according to their LinkedIn profiles. Hatice Karahan, who holds a PhD in economics from Syracuse University in New York, is an Erdoğan adviser, according to her LinkedIn profile.

The changes to Turkey’s monetary policy committee have been eagerly awaited by investors, who say they are optimistic about Erkan and Şimşek but have worried about the lack of lower-level appointments at the central bank.

Erkan, who specialises in developing risk management models for banks, on Thursday pledged to use “all of our tools” to bring inflation down over the next two years.

She said the central bank’s decisions would be “purely driven by the science” and that her team would use rigorous analyses to develop its monetary policy, which would focus on rate rises and tweaks to regulations meant to slow down the pace of loan growth across the economy.

The changes mark a change in direction from previous years, when Erdoğan had insisted on sharp rate cuts despite scorching inflation.

Investors have generally reacted positively to the economic changes since Erdoğan extended his grip on Turkey to a third decade.

The price to protect against a default on Turkish debt using five-year credit default swaps, a key barometer of perceived market risks, is at its lowest level since late 2021, according to Refinitiv data.

At the same time, foreign investors have pumped $1.6bn into Turkey’s equity market since June 9, central bank data shows.