Turkey: New CBT governor Karahan vows to maintain tight policy

• Karahan says monetary tightness to be maintained until inflation falls to levels consistent with target
• Karahan leaves door open for additional tightening
• Simsek says Karahan is excellent fit for post
• Karahan's relative Mercan linked to ruling party AKP, but this may not ire market much, in our view

New CBT governor Faith Karahan vowed to maintain tight monetary policy in first remarks after taking office, according to a brief?press release?by the bank on Feb 4. Karahan said that the main objective and priority for the CBT is to achieve price stability, and the CBT continues its efforts to ensure disinflation. The CBT is determined to maintaining the necessary monetary tightness until inflation falls to levels consistent with its target, he noted. This is in line with the?statement by the MPC on its January meeting?that the current level of the policy rate (45.0%) will be maintained as long as needed until there is a significant decline in the undying trend of monthly inflation and until inflation expectations converge to the projected forecast range. Karahan likewise mentioned inflation expectations and pricing behaviour as factors to watch going forward. He added that the CBT stands ready to act in case of any deterioration in the inflation outlook, leaving the door open for additional rate hikes, in our view. We think this remark by Karahan could be slightly more hawkish, compared to the MPC statement that promised policy action if notable and persistent risks to the inflation outlook emerge. To sum up, Karahan's first remarks in office as CBT governor support our forecast that the pivot to orthodox policy will remain in place after the reshuffling. Karahan is set to make his first appearance before the press as CBT governor in his presentation of the Q1 Inflation Report, scheduled for Feb 8.

Karahan has already been member of the MPC as deputy CBT governor since Jul 2022, before?his appointment as CBT governor?on Feb 3 to replace Hafize Gaye Erkan. Erkan resigned from the post due to personal reasons, according to social media posts by Erkan and the government's economic czar Finance Minister Mehmet Simsek, whereas the presidential decree on the reshuffling read that Erkan was dismissed. Similar to Erkan, Karahan was Simsek's pick, based on the latter's statement on the departure of Erkan. Simsek published a new message on the social media platform on X on Feb 4 that congratulated Karahan for the appointment. He said Karahan is an excellent fit for the post with his strong academic credentials and extensive experience, most of which was with the New York FED. This part of Simsek's statement appeared only in the English version of his congratulatory message on X, suggesting that it addressed foreign investors in particular. The market appeared to prefer other CBT governor Osman Cevdet Akcay as the new CBT governor, in our view, but we also think that Karahan will get the market's approval. Simsek added that the government was committed to supporting the disinflation process through restoring fiscal discipline and implementing structural reforms that would boost productivity and competitiveness.

Following Karahan's appointment, some local journalists commented that Simsek would have preferred Akcay over Karahan if he could have convinced the government. Noting that Karahan is nephew of Turkey's former ambassador to Washington Mehmet Mercan, who is among the founding members of the ruling party AKP and former lawmaker of the party, journalists commented that Karahan was an easier choice to convince the AKP circles about. Yet, an unnamed source very close to Simsek told later that Karahan was Simsek's first pick following the resignation of Erkan, local journalist Rasim Ozan Kutahyali reported. We do not expect that the link of Karahan's relative Mercan with the AKP to ire the market to a significant extent, given that Karahan himself has not been involved in politics. In another interesting note, incumbent Energy Minister Alparslan Bayraktar is the son-in-law of Mercan, the local media reported.