Analysis-Going holistic: Turkey’s new central bank chief pitches comprehensive policy

By Karin Strohecker and Jorgelina do Rosario

LONDON (Reuters) – Turkey’s new central bank chief pitched a comprehensive monetary policy in her first formal address to the media while her acknowledgment of stark inflation pressures was welcomed by foreign investors.

Laying out her philosophy in her debut news conference, Hafize Gaye Erkan pledged that her holistic approach would – in addition to interest rate hikes – make use of a range of levers and macroprudential policy tools, potentially including curbs on loan growth in key sectors or credit card spending.

Erkan, who was appointed in early June after President Tayyip Erdogan secured another term in office, vowed on Thursday to continue the gradual monetary tightening and more than doubled the bank’s end-2023 inflation forecast to 58.0% from 22.3%.

Her comments follow two smaller-than-expected interest rate hikes under her auspices in June and July – which lifted the benchmark to 17.5% – well behind inflation which ran at just below 40% in May.

But it was the repeated use of the word holistic – or “bütüncül” – by the former Goldman Sachs (NYSE:) banker and Turkey’s first female central bank chief that caught most of the attention.

“That’s the buzzword – holistic,” said Kaan Nazli, a portfolio manager at asset manager Neuberger Berman, who noted her emphasis on a slowdown in domestic loan growth – a lever to tighten policy outside the lifting of lending rates.

Under Erkan, the central bank has begun to simplify a complex set of macroprudential measures – those aimed at ensuring financial system’s stability – implemented under the former governor and has supported the rate hikes with qualitative and selective credit tightening.

“We are making the gradual and steady rate hikes more holistic and stronger through quantitative tightening and selective credit tightening,” Erkan told the news conference.

Erkan forms the country’s top economic team together with respected veteran policymaker Mehmet Simsek who returned to head Turkey’s Finance Ministry after the election. Both are expected to tackle economic strains that have sent the lira to consecutive record lows, embedded double-digit inflation and vaporised tens of billions of dollars of foreign exchange reserves.

Tim Ash, a strategist at BlueBay Asset Management said he had counted the new governor using the word eight times, earning her the nickname “Holistic Hafize” while her message to markets was that policy makers would opt for learning and calibrating in their decision making rather than shock-and-awe moves.

“The market just does not think that Simsek and Erkan have a mandate to do whatever it takes to fight inflation, at least not when it comes to policy rates, and that Erdogan is still the rate setter,” said Ash.

While a “holistic” approach sounded nice, said Ash, it was “really just a sanitised and alternative word for “unorthodox”.

SMOOTH PERFORMANCE

There was broad agreement among investors that Erkan is facing an uphill struggle with her strategy unlikely to deliver a swift pivot towards economic orthodoxy after years of Erdogan pushing for lower interest rates as a remedy for high inflation.

Her approach “is going to be a difficult sell,” said Marek Drimal, strategist at Societe Generale (OTC:). “Unless the credit and monetary tightening really kick in, investors would expect the central bank to hike more aggressively,” he said.

Sceptical about her policies, analysts still praised Erkan’s performance at the more than hour-long news conference.

Unlike some of her predecessors, Erkan chose to answer all the questions at the news conference herself, rather than defer them to her colleagues, switching easily between Turkish and English during the live event.

“She clearly wants to be the face of Turkish monetary policy making,” said Neuberger Berman’s Nazli.

She swerved politically charged questions on the influence of Erdogan’s government on monetary policy making – a thorny issue for the nation of 85 million where many are reeling under a cost of living crisis.

Emre Akcakmak at East Capital, said that Erkan’s inaugural conference left the impression of a competent policy maker with realistic expectations.

“She didn’t go into this fight with the past. She didn’t talk about the previous management. She could have talked about the mess that she’s in,” he said.

“We saw a person who seems to be capable of being a central bank governor, compared to previous governors, but cautious.”

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