Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and described interest rates as a "tool of exploitation".
While the lira's plight has made it "rational to expect at least 1000 basis points" added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision.
The bank had not touched interest rates since early June with markets becoming increasingly concerned that the policy of the nominally independent bank is being dictated by Erdogan.
"It nearly seems like it's a game of "good cop, bad cop" being played out between the Turkish authorities - with President Erdogan on the one hand still making statements regarding his dislike of interest rates and. a very sizeable reaction from the central bank in response to the recent inflationary and geopolitical developments", she said.
Thursday's decree and Erdogan's remarks come after the lira's drastic fall in value against the USA dollar last month, during one of the worst diplomatic rows between North Atlantic Treaty Organisation allies Washington and Ankara. It has lost around 40 per cent of its value this year.
Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".
Phoenix Kalen at Societe Generale said the market was both pleased and confused by the bank's move.
It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".More news: European Union executive will get tough with countries breaking rule of law: Juncker
More news: Hurricane Florence: Carolinas brace for 'storm of lifetime'
More news: Digger: Klopp doesn't need silverware this season
In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed.
The Turkish lira began to recover shortly after the rate hike, strengthening by 3% to 6.16 against the dollar.
Currently, the interest rates are below the annual inflation level in Turkey.
Despite the comments, Erdogan added: "There has been no change in my sensitivities on the issue of interest rates".
Analysts say the lira´s plunge last month had been sparked by a combination of concerns over domestic policymaking and a crisis in relations with the United States.
Washington has imposed sanctions on two Turkish ministers and doubled tariffs on steel and aluminum imported from the country.
The lira hit new lows in late July after the Turkish central bank left interest rates unchanged as inflation continued to rise.