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Big switch at Turkish central bank – but not in policy

The reshuffle at Türkiye’s central bank brings about a big change at the helm but is all but sure to keep in place the government’s commitment to more conventional policymaking endorsed after last year’s elections, according to analysts.

In a surprise resignation on Friday, Hafize Gaye Erkan stepped down as the governor of the Central Bank of the Republic of Türkiye (CBRT), citing the need to protect her family from what she called a media smear campaign.

The government was fast to react and asserted that its economic program would carry on after Erkan’s departure. President Recep Tayyip Erdoğan swiftly appointed Erkan’s deputy, Fatih Karahan, who over the weekend said he would carry on with the tight policy stance until inflation falls to levels consistent with their target.

The personnel change came as the aggressive interest rate hikes of Erkan, the bank’s first female chief, had begun cooling inflation expectations after Erdoğan’s reelection and appointment of a new Cabinet after the May vote.

The new administration shifted course from a yearslong easing policy and delivered consecutive rate increases aimed at arresting soaring inflation, reducing trade deficits, rebuilding foreign exchange reserves, and stabilizing the Turkish lira.

The team is led by Treasury and Finance Minister Mehmet Şimşek and other market-friendly technocrats that Western analysts saw as Türkiye’s best bet as it starts winning back foreign investments.

Karahan, a former Federal Reserve Bank of New York economist, was appointed deputy in July and is seen as a capable successor who played a big role in engineering the monetary tightening that saw the central bank lift its key policy rate to 45% from 8.5% since June last year.

After another 250 basis-point rise last month, it said it had tightened enough to achieve disinflation, signaling a halt.

In his first remarks after his appointment, Karahan on Sunday said the priority was price stability, and that he would continue efforts to ensure disinflation, relying on a strong team.

“We will be watchful of inflation expectations and pricing behavior. We stand ready to act in case of any deterioration in the inflation outlook,” he said in a written statement.

Data on Monday showed inflation climbed a bit more than expected to 6.7% monthly and 64.86% annually in January, partly due to a big minimum wage jump and an array of new-year price updates.

It is expected to begin dipping after May.

Şimşek said on Sunday that he was looking forward to working with the new governor and his team in implementing his government’s economic program, unveiled last September.

“Governor Karahan is an excellent fit. With extensive experience, most of which was with the Federal Reserve Bank of New York, I have no doubt he will excel in this new role,” Şimşek said on social media platform X.

“We are committed to supporting the disinflation process through restoring fiscal discipline, while also implementing structural reforms,” he added.

Appointing one of the deputy governors to head the bank supports the Finance Ministry ministry’s assertion that the current central bank strategy is fully supported by President Erdoğan, Goldman Sachs said in a note to clients.

“We therefore view the appointment as positive as it should allay any concerns over a near-term loss of political support for the Bank,” it said.

JPMorgan analysts even deemed the appointment as “positive for disinflation and the Turkish lira,” suggesting that the reshaped Monetary Policy Committee (MPC) might lean toward an even more hawkish stance.

They said they anticipate higher interest rates for a longer period, noting that the monetary policy was likely to be more sensitive to the future inflation outlook.

Morgan Stanley expressed the view that the change does not signal a shift in policy or a political preference for lower rates.

HSBC echoed a similar sentiment, stating in a note that they do not expect the change to impact monetary policy. Its analysts said they believe that the tightening process concluded last month and anticipate interest rates to remain unchanged throughout the year.

However, Deutsche Bank reported that the reshuffle, along with the increase in inflation, may pave the way for another rate hike.

Its analysts mentioned that considering the short-term stronger inflation pressure, they expect an additional 250 basis points or 500 basis points of interest rate increase. They also stated that even without a hike, they do not anticipate a rate cut this year.

“The fact that the new president was part of the team making recent decisions and, as stated in Şimşek’s announcement, has support for this position, makes the likelihood of a negative turn in the implemented monetary policy low,” said Haluk Bürümcekçi, founding partner at Bürümcekçi Consulting.

Serkan Gönençler, a chief economist at financial firm Gedik Yatırım, also said the assurances from Cabinet leaders “relieve concerns about the continuity of the economic program.”

Foreign investors, including world heavyweights Pimco and Vanguard, began buying Turkish assets late last year in a strong signal of confidence in the new road map.

Karahan’s first public appearance will be in Ankara on Thursday when he will hold a briefing on the first inflation report of the year. Economists await to see whether and how much the bank raises year-end inflation expectations and how that might affect policy.

Karahan, 42, has a University of Pennsylvania economics Ph.D. and worked as an economist at the Federal Reserve Bank of New York for almost a decade, according to his biography.

He also taught as an adjunct professor at Columbia University and New York University and worked for Amazon as a principal economist in 2022.

“We already believe that the hawkish dose of the messages given at the last MPC meeting of the central bank is strong; we expect these messages to be supported in the Inflation Report,” said Bürümcekçi.

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