Turkey's new central bank governor, ex-Wall Street investment banker Hafize Gaye Erkan, made her public debut before the cameras on July 27 and won instant praise from investors for delivering a somewhat realistic inflation forecast. Erkan projected end-2023 official headline inflation at 58.0%, a stark increase on the 22.3% anticipated in the previous inflation report delivered by her less-than-market-friendly predecessor.

Erkan also vowed to continue the central bank's gradual monetary tightening, launched soon after she and new finance minister, former Merrill Lynch economist Mehmet Simsek, were appointed in a change of direction towards more orthodox economics by President Recep Tayyip Erdogan following his re-election in late May, a poll triumph that came despite Turkey’s ec0nomy being, in the eyes of many analysts, on the edge of catastrophe, partly due to loose monetary policy that flew in the face of rampant inflation.

Erkan said the exchange rate of the lira, which has weakened sharply this year, was the key factor in the upward revision in the inflation forecast. The end-2024 inflation prediction now stood at 33% compared to the 8.8% given in the central bank’s previous inflation forecasting, she added.

"Until a significant improvement in the inflation outlook is achieved, we will gradually strengthen monetary tightening as and when necessary," Erkan said in a speech.

A week ago, the central bank hiked its policy rate by 250bp to 17.5%. The increase was smaller than what was expected by markets. Prior to that, following Erkan’s first monetary policy committee (MPC) meeting, the benchmark rate was raised by 650bp, despite the market wanting substantially more.

Official annual inflation dropped to 38.21% in June, having peaked at a 24-year high of 85.5% last October.

Prominent Turkish economists, most of them seen as government critics, welcomed Erkan’s inflation report, saying she appeared to be more “realistic” than her predecessor.

“Analyses in the report are more realistic than the ones in the previous reports,” said Hakan Kara on Twitter.

In terms of clarity in her presentation, she was much better in comparison to the presenters on business TV channels, said Ugur Gurses, adding: “The inflation forecasts are realistic.”

“The report is based on strong analyses. The inflation forecast at 58% for the end of 2023, even though I expect a much higher inflation rate, is reasonable,” said Fatih Ozatay. He, however, was critical of Erkan for not explaining why the policy rate is at 17.5% and why the interest rates on deposit accounts are kept low.

“This was a very decent presentation by a governor of a central bank whose credibility has greatly eroded and with no independence,” commented Selva Demiralp, an academic.

“She [Erkan] was sincere about how more tightening is needed. The inflation estimate is realistic… this will boost [the central bank’s] credibility,” added Demiralp.

“At last… what we are seeing is a realistic end-year inflation forecast from the CBRT [Central Bank of the Republic of Turkey],” said Gizem Oztok Altinsac. 

Reuters quoted three analysts.

Piotr Matys, senior FX analyst at In Touch Capital Markets in Poland, said: "Governor Erkan's public debut is an excellent opportunity to gain market credibility and convince investors, who so far have been disappointed with the pace of monetary policy tightening (at least the vast majority of them), that she is fully committed to bring inflation under control."

"Remarks from Governor Erkan imply that she wants to reduce staggeringly high inflation without causing structural damage to the real economy. This would be enormously challenging for a fully independent central bank that is supported by a technocratic government, which can't be said about Turkey."

Charu Chanana, market strategist at Saxo Markets in Singapore, said: "Turkey's inflation outlook remains precarious and merely raising the inflation forecast or promising gradual monetary tightening may not be enough. Real action will likely be awaited by investors."

Stuart Cole, chief macro economist at Equiti Capital in London, concluded: "She is saying all the right things."

He added: "I wonder whether part of her strategy today is playing to the gallery as much as anything else. She is probably aware the government will not be relishing the tightening in policy she is proposing, so if she can get the markets on side, maybe it makes it a little bit more difficult for her to be replaced?"