Turkish vice president Yilmaz sees inflation reprieve, with full Erdogan backing

By Nevzat Devranoglu, Birsen Altayli and Jonathan Spicer

ANKARA (Reuters) -Turkish Vice President Cevdet Yilmaz said he expects savings from the government's new efficiency plan to outstrip estimates as it continues the fight against inflation this summer with the full backing of President Tayyip Erdogan.

Yilmaz, in an interview with Reuters on Thursday, said he expects an international crime watchdog to remove Turkey's "grey-listing" next month. Not upgrading Turkey in June would amount to a political decision by the Financial Action Task Force, he said.

Yilmaz, who over the last year has spearheaded a dramatic U-turn toward a more orthodox economic policy, predicted that summer price relief would help convince sceptical Turks that inflation is dipping after years of soaring prices.

To bolster the central bank's aggressive interest rate hikes, Yilmaz and Finance Minister Mehmet Simsek unveiled a "savings and productivity" plan on Monday focused on pausing construction of most new state buildings and public institutions' purchase of vehicles for three years.

Though they did not outline expected budget savings, some analysts said it could amount to roughly 100 billion Turkish lira ($3.1 billion).

"It looks like it will be far above that," Yilmaz said of the estimate, speaking in his office at the Presidential Palace in Ankara.

"We believe we will experience a serious break in inflation especially in the summer period this year," he said.

"The improvements in certain issues that affect daily life will positively impact our citizens' perception," and "create a different psychology in terms of inflation expectations."

Inflation hit 70% last month - the highest in emerging markets except Argentina - and is expected to peak in May at around 75%, after which the central bank expects it to fall to 38% by the end of the year as the monetary tightening weighs.

Many Turks remain sceptical that price relief is coming after years of eroded savings. Annual inflation expectations were near 120% last month and 95% for end-2024 based on the Turkey Household Inflation Expectations Survey by Koc University and Konda Research.

'POLITICAL UNCERTAINTY'

A longtime member of the ruling AK Party (AKP), Yilmaz was appointed in June last year to help reverse years of policy unorthodoxy under Erdogan, who had in the past urged rate cuts to lower inflation.

Loose monetary policy sparked a series of currency crashes and sent inflation soaring, economic pain that weighs on the president's popularity.

But since Erdogan was reelected in May last year, Ankara has cut regulations to free up financial markets and sought to cool the overheated emerging market economy. The central bank has hiked interest rates to 50%, from 8.5% last June.

Yilmaz told Reuters that last year's election lifted any "political uncertainty" about Erdogan's determination to lower inflation.

"He states that he stands behind (the economic programme) and that he supports it at every opportunity... I believe there are no doubts left on this issue," Yilmaz said.

He added he is confident the central bank will hit its inflation target even if it does not hit the "bulls-eye" exactly at year-end.

Analysts said the savings and productivity plan would help rein in spending but that more cuts were needed, perhaps to public sector salaries or pensions, in order to help hit the inflation goal.

GREY LIST

The FATF, set up by the G7 group of advanced economies to protect the global financial system, grey-listed Turkey in 2021 over money laundering and terrorist financing concerns.

Yilmaz confirmed a Reuters report that a FATF team held an "on-site" visit with Turkish authorities this month ahead of a June 28 decision whether to upgrade the country.

"I think we will be taken off the FATF grey list in June. If we are not, I believe this will be due to political reasons, not technical reasons," Yilmaz said.

"From a technical aspect, I believe there are no obstacles left. I think Turkey fully meets the technical criteria," he added.

Research shows that an upgrade could lead to more foreign direct investment (FDI), which Yilmaz said is not yet at desired levels.

Turkey's FDI inflows amounted to $1.5 billion in the first quarter of the year, down 52% from the quarterly average in the previous three years, according to the International Investors Association.

($1 = 32.1970 liras)

(Reporting by Nevzat Devranoglu, Birsen Altayli and Jonathan Spicer; Additional reporting by Ece Toksabay and Tuvan Gumrukcu; Editing by Susan Fenton, Alexandra Hudson)