The 5th change of Central Bank (CBRT) governor in the last 5 years took place on the last day of last week. Hafize Gaye Erkan, who has been subjected to harsh criticism over her family’s role in the Central Bank for some time, asked for her pardon from her position as the governor of the Central Bank of the Republic of Turkey in a message posted on the X platform on Friday night last week. Following Erkan’s departure, CBRT Deputy Governor Fatih Karahan was appointed as governor, and for the first time in recent years, economists, market experts and even foreign investment banks welcomed the change of governor.
Hafize Gaye Erkan, who asked for her pardon, saying she had been subjected to a reputation assassination, will hand over her post to Fatih Karahan, one of the deputy governors. Since his appointment as deputy governor, Karahan has revitalized the Central Bank’s economic research and pioneered the publication of working papers on monetary policy and its effects.
From Fed economist to CBRT
After graduating from Boğaziçi University in Mathematics and Industrial Engineering in 2006, Karahan received his master’s and PhD degrees in Economics from the University of Pennsylvania in 2012. He started his professional career as an economist at the Federal Reserve Bank of New York in 2012 and served as the Head of Labor and Product Market Studies and monetary policy advisor until 2022. Karahan, who also worked as a part-time lecturer at Columbia University and New York University, became a senior economist at Amazon in 2022. Karahan was appointed Chief Economist at Amazon in November 2022. On July 28, 2023, he became the Deputy Governor of the Central Bank of the Republic of Turkey.
Different from the Naci Agbal case
All three economists we asked to comment on Karahan’s appointment pointed to his strong macroeconomic muscles. Another point that economists agree on is the confidence that there will be no change in the monetary policy. Economists pointed out that the current change of governor is different from the previous change under Naci Agbal, and pointed out that the strength of Treasury and Finance Minister Mehmet Simsek is also seen in this change. Economists pointed out that only 1 minute after Erkan’s post on social media, the Ministry of Treasury and Finance released a statement in which Simsek said, “The decision taken by the former Governor of the Central Bank, Ms. Hafize Gaye Erkan, is completely personal and at their own discretion. I wish success to the new Governor of the Central Bank of the Republic of Turkey and the team who will be appointed in line with my recommendation.” Economists also claimed that there were some conflicts between Erkan and Simsek during his tenure. Economists also expect tighter relations and a more harmonized monetary and fiscal policy with Karahan, who was appointed on Simsek’s recommendation, as stated in his statement.
No U-turn expected
Reminding that Erkan’s name had never been heard in the field of central banking until his appointment to the CBRT, economists pointed out that Karahan has a strong background in this field. According to economists, what is important for the markets is that monetary and fiscal policies continue on the same line and that there is no U-turn. Since no change in policies was expected in Erkan’s case, economists do not expect the change of office to have a lasting effect on the markets, pointing out that they believe that policies will continue on the same course even if there is a change of president. In fact, the economists pointed out that if the change of governor will have an impact on monetary policy, it will be positive and emphasized that the credibility of the Central Bank, which has been eroded due to the news about Erkan’s family in recent weeks, has the opportunity to be repaired with this change. In addition, as Karahan is described as more hawkish, economists expect the policy rate to be kept at 45 percent for a long time, while the interest rate cut cycle, which was previously expected to start around July, has been eliminated.
Governor Karahan’s first message is determination
CBRT Governor Fatih Karahan delivered a message of firmness and determination in his first message after his appointment. Governor Karahan’s message is as follows: “The main objective and priority of our Central Bank is to ensure price stability. In this direction, we continue our efforts to ensure disinflation with our strong team with determination. We are determined to maintain the necessary monetary tightness until inflation falls to levels consistent with our target. We closely monitor inflation expectations and pricing behavior. We will definitely not allow any deterioration in the inflation outlook.”
Rate hikes more likely than rate cuts
Following the change of governor at the Central Bank, reports from three international investment banks poured in. JP Morgan’s note stated that Karahan and his two hawkish deputy governors will guide MPC decisions with a greater focus on inflation, “Although sudden leadership changes create discomfort for investors, we see the new CBRT Governor as positive for disinflation and the lira. We think the reshaped MPC will probably be more hawkish. The dovish bias in the last MPC statement is now likely to be reversed.” Morgan Stanley also noted that they expect it to maintain its traditional monetary policy prioritizing the fight against inflation under Karahan. “Unlike past changes of governors in 2019 and 2021, this change does not signal a change in policy direction or a political preference for lower interest rates,” the note said. Noting that they expect the continuity of monetary policy after the change of the CBRT governor, Morgan Stanley explained that they expect the Central Bank to maintain the traditional monetary policy framework prioritizing the fight against inflation under Governor Karahan. “We do not expect the change of governor to lead to a change in monetary policy,” HSBC said in its note, adding that they think the CBRT’s tightening process ended last month and they expect the policy rate to remain unchanged throughout this year.
Erkan, who took office in early June, raised the policy rate from 8.5 percent to 45 percent at the end of July with his team strengthened by the appointment of three deputy governors, Cevdet Yılmaz, Fatih Karahan and Hatice Karahan. The new Governor Karahan will face the press and economists in his first week in office. The first inflation report of 2024 will be announced on Thursday this week. On February 8, the meeting to be held at the Central Bank in Ankara will be the first inflation report presentation under Karahan’s presidency. With the report, the Central Bank’s year-end inflation expectation of 36 percent is expected to be revised upwards.