Interest rates were increased to 24 percent from 17.75 percent, which is more than double the median of investor predictions of a 3 percent hike.
The bank's Monetary Policy Committee said in a statement it was implementing "a strong monetary tightening to support price stability".
Its decision came despite Erdogan repeating his opposition to high interest rates earlier in the day, saying high inflation was a result of the central bank's wrong steps.
Erdogan took over as Turkey's first executive president in July with sweeping new powers, including oversight over economic policy and the ability to appoint the central bank governor. In May this year, the Turkish leader prompted one of the biggest ever losses to the lira when he declared to investors in London that he believed higher interest rates are the reason for high inflation.
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"Central Bank has announced the inflation rates for the last 16 years, but the rates have never materialized as they have declared". The decree also forbade signatories from indexing their transactions to foreign currencies, while ordering existing contracts in other currencies to be switched to the lira by October 12.
"My sensitivities concerning interest rates are the same, nothing has changed", Erdogan said.
Last month, the U.S. imposed sanctions on two Turkish government ministers and also imposed tariffs on imports of Turkish steel and aluminium in a bid to pressure Turkey to release Brunson. "We will not give them the opportunity to drive the state into a corner".
It added that in the current contracts, the agreed prices in foreign currencies will be redefined as Turkish lira within one month and the terms of the decree will be executed by the Finance and Treasury Ministry.
The lira's gains is also proving to be a positive across emerging markets as well with the rand and rouble also gaining on the day, both currencies up by more than 1% against the dollar.
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In addition, Erdogan encouraged the Turkish public to keep their savings in lira, and he appealed to the private sector not to abandon production or their investments.
The downside to higher rates is that these will boost local borrowing costs and crimp domestic demand.
Economist Demir says, though, that the situation could have been far worse. In the other direction, with the economy heading into recession, lower rates would help inject growth stimuli.
Thursday's rate hike appears to have bought time for the Turkish economy and the nation's besieged currency. It advanced 2.2 per cent last week after policy makers said their monetary stance "will be adjusted" at the 13 September decision "in view of the latest developments".
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