ISTANBUL, Oct 27, 2023 (BSS/AFP) - Turkey's central bank sharply lifted its policy rate for the fifth month running on Thursday as part of its politically charged battle against historically high inflation rates.

The bank said it was taking its main lending rate to 35 percent from 30 percent because "inflation readings were above expectations" over the past three months.

Its statement also retained a pledge to raise rates further "in a timely and gradual manner" until "a significant improvement in the inflation outlook" is achieved.

Turkey's official annual inflation rate peaked at 85 percent last October and climbed back up above 60 percent last month.

The interest rate hike was largely in line with expectations and left the lira trading flat at around the 28.15 to the dollar.

"It feels like we will see another two 500 basis point hikes now to year end, with policy rates likely ending at 45 percent," emerging markets analyst Timothy Ash remarked.

The Turkish bank has now more than quadrupled borrowing costs since President Recep Tayyip Erdogan dropped -- or at least put aside -- his lifelong objection to the idea that raising interest rates helps fight inflation.

The Turkish leader had entered a difficult May election pledging to never allow the bank to raise its key rate while he was president.

He reversed course after winning and tasking a new team of Wall Street-trained economists with the job of steering Turkey out its worst cost-of-living crisis during Erdogan's two-decade rule.

Erdogan has given his new appointments several crucial votes of support in the past few months.

He told his ruling party faithful on Wednesday that Turkey was waging a "multifaceted fight against inflation".

"It takes time to see the steps taken in the economy reflect on people's daily lives," he said in televised remarks.

- 'Managed depreciation' -

Turkey's latest economic crisis began when Erdogan decided to fight inflation by directing the nominally independent central bank to start slashing borrowing costs two years ago.

The lira promptly crashed as Turks bought up gold and dollars to buffer themselves from further economic shocks.

The central bank is estimated to have spent well over $200 billion dollars trying to prop up the lira since Erdogan launched his economic experiment.

The post-election policy shift has included a decision to allow the lira to weaken in order to ease the pressure on central bank coffers.

Analysts believe the lira interventions were also starting to eat away at the competitiveness of Turkish exports to Europe and other parts of the world.

The lira has been allowed to shed nearly 30 percent of its value against the dollar since the night of Erdogan's re-election.

"It looks like the (central bank) currently has the lira locked in a managed depreciation regime, with a seeming target of around 30.00 at year-end," ING Bank said in a client note.

- Credibility -

Erdogan's votes of support are seen as crucial for Turkey's economic course.

Analysts and investors still recall how he fired a central bank governor who defiantly raised borrowing costs early last year.

"The Central Bank of Turkey's credibility has been ruined over the years," Conotoxia investment house analyst Bartosz Sawicki remarked.

"The faith that (it) will be able to pursue restrictive polcies is impossible to be re-established in just a couple of months."

But others disagree.

Central bank governor Hafize Gaye Erkan has been able to handpick a handful of respected allies to the rate-setting agency's board.

Finance Minister Mehmet Simsek has been travelling the world in the past few months and telling top investors that he and Erkan have Erdogan's full support.

"The central bank's policy tightening and its recent communications have helped to rebuild its credibility and generate confidence that it is taking a more serious stance against inflation," Capital Economics analyst Liam Peach said.

"There's little indication that the (bank) is looking just yet to slow the pace of tightening."