The increase, which was higher than expected, boosted the lira by five percent against the dollar and may ease investor concern about Erdogan's influence on monetary policy.
Turkish President Recep Tayyip Erdogan has accused the United States of launching what he called a "heinous economic attack" on Turkey after the national currency lira hit a record low following USA sanctions.
He's delivered on that pledge, ousting the old guard of policy makers who'd guided the economy since 2002 and giving himself the sole authority to make appointments at the central bank and other state organizations.
The central bank said deterioration in pricing behavior continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.
Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".
The lira reacted strongly to the decision, rising by five percent to the U.S. dollar.
The central bank and government have taken a series of measures to support the ailing currency, with Erdogan ruling early on Thursday that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currency.
The bank must balance concerns over slipping growth, which, although a robust 5.2 per cent in the second quarter on an annual comparison, showed signs of weakness with some analysts predicting Turkey is heading for recession.
He earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.
"Interest rates are the cause, inflation is the result".
Inflation also soared this month to a 15-year high of nearly 18%.
The next two Monetary Policy Committee meetings are to be held in October. In one direction it could hear the siren call of investors craving higher interest rates to draw a line in the inflationary sand and stop the lira's collapse. They increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.
We will see the results of central bank independence after the rate hike.
Turkey's currency and inflationary troubles are also compounded by the threat of steel and aluminium tariffs from the USA as well as sanctions over the detention of an American evangelical pastor.