Erdogan Taps Ex-First Republic Co-CEO as Central Bank Head

Turkish President Recep Tayyip Erdogan named Hafize Gaye Erkan, a former co-chief executive officer of First Republic Bank, as his new monetary chief, a move that may mark the end of ultra-low interest rates and constant government interventions to prop up the lira.

(Bloomberg) — Turkish President Recep Tayyip Erdogan named Hafize Gaye Erkan, a former co-chief executive officer of First Republic Bank, as his new monetary chief, a move that may mark the end of ultra-low interest rates and constant government interventions to prop up the lira.

The announcement, made just after 1 a.m. local time on Friday, brings Erdogan closer to completing a makeover of his economic team after reelection last month to extend his two decades in power. Erkan worked for nearly a decade at Goldman Sachs Group Inc. before spending almost eight years at failed regional lender First Republic.

Erkan becomes Turkey’s first female central bank governor and faces the unique challenge of working for a president who believes — contrary to empirical evidence and mainstream theory — that cheaper money leads to slower inflation. The appointment follows Erdogan’s pick of ex-Merrill Lynch bond strategist Mehmet Simsek as treasury and finance minister.

Erkan, who lived in the US for more than 20 years, left San Francisco-based First Republic in a surprise move about 18 months before its collapse in May. She then became CEO of Greystone, a New York-based commercial-property lender, but left after a few months. 

The lira was 1.5% weaker near 23.47 per dollar as of 12:19 p.m. in Istanbul. Its depreciation has accelerated this week as state banks temporarily reined in efforts to bolster it. Turkish stocks rose.

Erkan replaces Sahap Kavcioglu, who served for just over two years and firmly backed Erdogan’s belief that lowering interest rates was the best way to combat inflation. In a separate presidential decree published on Friday, Kavcioglu was named the new head of Turkey’s banking regulator, taking over an institution that once had a crucial role but was sidelined as the central bank pursued policies to channel loans to favored industries and promote the use of the lira.

“Erkan’s appointment hopefully marks an improvement over the policies of her predecessor,” said Nick Stadtmiller, head of product at Medley Global Advisors. “The lingering question is whether Erdogan will allow the central bank to raise rates sufficiently to bring down inflation.”

Turkey joins a club of fewer than two dozen central banks globally that have a female chief. A study earlier this year suggested that at the current rate of progress, it would take over a century for there to be an equal number of women and men at the helm of monetary authorities and major financial institutions.

The unorthodox economic policies under Erdogan have contributed to a cost-of-living crisis and prompted foreign investors to pull billions of dollars out of Turkish bond and stock markets in recent years. Inflation, which peaked at over 85% last year, has decelerated but remains around 40%.

Erkan’s ability to slow price rises and bring back portfolio investors will depend in large part on how much autonomy Erdogan — a self-described “enemy” of high interest rates — gives her. He’s fired previous governors for tightening monetary policy too much and as recently as May 19 said that interest rates would come down further.

Investors will be watching for a big rate hike at the central bank’s next meeting on June 22. JPMorgan Chase & Co. and Barclays Plc expect the base rate to be increased by 16.5 percentage points to 25%. JPMorgan says the bank may opt to make the move even earlier.

Bloomberg Economics doubts there will be an emergency meeting before late June, expecting the central bank to put out a statement before then to underscore its commitment to price stability and hint at a lift in rates.

Despite the state interventions, the lira is down more than 20% this year. It’s the worst performer among major emerging currencies after Argentina’s peso.

What Bloomberg Economics Says…

“We see the reversal of the central bank’s accommodative stance as the first step needed before its complex policy set, aimed at supporting the lira, can be dialed back. A weaker lira could in fact be a policy choice for an economy facing a high current account deficit, by giving exports a competitive price boost. It could also help attract higher tourist numbers and spending.”

— Selva Bahar Baziki, economist. Click here to read more.

Unlike some of her predecessors, Erkan’s background is primarily in finance and not economics. She earned a Ph.D. from Princeton University in financial engineering and applied mathematics, according to her LinkedIn page, and her roles at First Republic included president and chief investment officer. 

Following her short stint at Greystone, she started occasionally writing for Turkish daily Dunya. Though her broader views on policy remain little known, her columns give a rare insight into her take on current events in the global economy. 

In March, she argued the Federal Reserve’s monetary tightening raised the risk of a recession in the US by the end of the year and pondered the alternative offered by Japan’s low rates policy.

The Turkish central bank has been at the center of the growth-at-all-costs strategy that Erdogan has pursued since he turned his office into the nexus of all executive power in 2018.

Before installing Kavcioglu as governor in March 2021, Erdogan ousted his three predecessors for tightening monetary policy too much. Under Kavcioglu, the central bank slashed the benchmark to 8.5% from 19%, despite prices spiraling higher.

“I remain cautious that monetary and economic policy will shift to a more investor-friendly direction as Erdogan remains in the driver’s seat,” said Brendan McKenna, strategist at Wells Fargo & Co. in New York.

–With assistance from Karl Lester M. Yap, Tom Redmond, Patrick Sykes, Asli Kandemir and Zoe Schneeweiss.

(Updates throughout.)

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