CBRT: Ending extraordinary policies and appointing a new Governor

In a move that could signal a return to more traditional monetary policy, President Mr. Recep Tayyip Erdoğan appointed Hafize Gaye Erkan as the new central bank governor, replacing Şahap Kavcıoğlu. Announcement made in the Official Gazette with the Decree, It reflects the renewal of Erdogan's top economics team following the appointment of Mr. Mehmet Şimşek as Minister of Treasury and Finance.

During his governance, Kavcioğlu had made a monetary policy loosening in line with Erdogan's economic doctrine that lowering interest rates could slow down inflation. Erkan, who is the first female president of the CBRT, has senior banking management experience in the US. Erkan, previously Goldman Sachs Group Inc. and at San Francisco-based First Republic Bank, which went bankrupt in May, more than a year after Erkan left her position as CEO.

To understand her profile;

·        Erkan graduated from Boğaziçi University, Department of Industrial Engineering in Turkey, and holds a PhD in financial engineering and applied mathematics from Princeton University.

·        Nearly eight years at First Republic in roles that included president and chief investment officer.

·        Turkish officials, including Şimşek, started to evaluate Erkan for the central bank shortly after the 28 May elections.

Before the elections in May, Erdogan made evaluations about further rate cuts. Şimşek, on the other hand, immediately pointed out that after his appointment, Turkey had no choice but to "fight inflation on a rational basis". After the management change in the economy for the last week, changes were expected in the institutions. Therefore, the new appointment at the Central Bank was an expected decision in terms of transforming the intellectual transformation into an operational transformation in the economy. The appointment of Erkan, as she has a very strong CV and is recognized by Western markets, can be taken as a sign that the extremely low borrowing costs, which cause inflation to rise, will normalize in terms of monetary policy.

The Central Bank will hold an important meeting on June 22. Before that, the statements of the new Governor will be followed closely. The message received and the expectations formed so far point to a strong signal of policy transition, and the 22 June MPC meeting is in a critical position for its implementation. The most important issue is to what level the policy rate will be drawn and whether it will be an aggressive one-time step or a gradual transition over several meetings. Many different transition scenarios can be derived. Our view is that the Central Bank's expected inflation analysis will form the basis for the final level of the policy rate. These expectations are 29.8% in the 12-month period in the CBRT Market Participants' survey, 40% in terminals such as Bloomberg and Reuters, and 22.3% in the CBRT's latest Inflation Report. If the CBRT does not raise all interest rates at once on June 22, the updated expectations in the Inflation Report to be published in July will reveal where the CBRT finally sees the policy rate.

Under all these assumptions, it seems very likely that the policy rate will be raised to 30%. Such a one-shot step might be extreme, as the policy rate is currently 8.5%. Although raising the policy rate would be practical in practice, such as putting the Central Bank at the center of the transmission mechanism, foreign currency positions, loan rates and floating interest rates are still in a position to be affected. For this reason, the interest rate step can be divided or the interest rate corridor can be applied for a certain period. In any case, we consider that the first step to be taken at the meeting on June 22 will be the biggest step. If the Central Bank will increase interest rates more than once, it will realize the largest tranche at the first meeting.

With the effect that the economy administration will reduce interventions on TL and adopt a liberal approach, the lira fell to 23.5 against the dollar and reached a new record level. This year, it has dropped 20.3% overall, which is more depreciation than nearly all its emerging peers.

Lira's Losses Accelerate… The Turkish Lira has lost more than 20 percent of its value this year… Source: Bloomberg, Dinamik Yatırım

Another appointment is that former CBRT Governor Kavcıoğlu is the new head of the BRSA. Kavcıoğlu was appointed as the Governor of the CBRT in March 2021, after his predecessor Naci Ağbal was dismissed for tightening monetary policy too much. During this period, Kavcıoğlu refrained from increasing interest rates, on the contrary, he reduced the benchmark policy rate, which was 19%, to 8.5% at the last time during his governance. Inflation peaked at 85.5% last year, then reached 39.6% in May 2023 with the help of the strong base effect.

Of course, the policy set is not just about interest. There are many factors, from loan supply and conditions to the monetary base. Although the duties of the BRSA and the CBRT are different, macro precautionary measures have been as effective as monetary policy in the recent period, and there are also those within the scope of duty of the BRSA. In the new economic period, the BRSA will play a very important role in directing the demand with non-interest instruments. Our expectations are to direct the loan supply with a selective approach in loans. Since there have been so many regulations that have made it difficult for the banking system to function, we think that there should be a simplification in the liraization rules, and that macroprudential steps should help monetary policy in demand conditions.

Kaynak Dinamik Yatırım – Enver Erkan

Hibya Haber Ajansı