a woman at the head of the central bank to fight inflation

2023-06-09 17:45:10

As the Turkish lira continues to depreciate, President Erdogan has chosen a new leader for the central bank: Hafize Gaye Erkan. It is a woman, which is a first in the history of Turkey. But it is above all an expert who worked for twenty years in the finance sector in the United States, at Goldman Sachs and then First Republic. This professional past suggests a return to a more orthodox monetary policy, after several years of errors.

This appointment also follows that of Mehmet Simsek, who also worked as a senior executive in an American bank, Merill Lynch, as the new finance minister in the team of President Erdogan, recently re-elected.

Central bank rates could rise to 25%

Hafize Gaye Erkan and Mehmet Simsek therefore embody the new faces of Turkish economic policy. And as they face a degraded situation, they will no doubt have to make difficult decisions.

Turkey is experiencing inflation of 40%, while the currency has lost another 20% since January 1. This inflation is maintained by maintaining low interest rates. The former governor of the central bank had reduced the main key rate from 19% to 8.5%, at the request of President Recep Tayyip Erdogan. The latter has chosen for several years to boost economic activity with reduced rates, which has led to this inflationary skid.

It now seems ready to change course. Hafize Gaye Erkan has not yet revealed anything of her choices. But, according to estimates by Barclays Bank, it could choose to raise the main key rate to 25%, in successive stages, in order to defeat inflation.

A slowdown in economic activity

The next meeting of the monetary committee of the central bank of Turkey is scheduled for June 22 and this is the time when it will have to specify the orientation of its monetary policy.

This rise in rates, if confirmed, could result in a sharp slowdown in economic activity in Turkey and in multiple difficulties for the most modest households. With municipal elections slated for a year from now, it remains to be seen whether President Erdogan is ready to let the new central bank leader act independently.

The choice, in any case, to renew his economic team suggests that he wants a change of course. And that he is ready to review the policy to which he was attached, against all odds, despite the skepticism it aroused on the part of investors.