The slump in the lira has been driven by concerns about Erdogan's influence on monetary policy, and more recently a bitter row with the United States that saw the North Atlantic Treaty Organisation allies impose reciprocal trade restrictions and sanctions on each other.
He described the sudden fall in the value of the lira last month, when the currency reached more than seven against the dollar, as an "economic assassination attempt".
The monetary policy committee of the bank said the one-week repo rate was being lifted to 24 percent from 17.75 percent, the first rate hike since June.
The central bank said in its statement that there was still an upside risk to Turkey's inflation outlook from what it called a deterioration in pricing behavior, despite weaker domestic demand conditions.
The lira rose after the decision and was trading 5.3 per cent higher at 6.0254 per dollar at 2:04 p.m.in Istanbul.
Signs of movement in the US-China trade stand-off and a bumper interest rate hike in emerging market trouble spot Turkey sent world shares higher today as risk appetite returned.
Analysts have called for Turkey to hike its key interest rate by as much as 10% to combat inflation, which is running at 16%. The bank is due to publish its latest decision later Thursday and investors are hoping for an increase in rates.
The lira tanked to a dramatic file low of 7.24 to the dollar on August 13 after Trump known as for elevated tariffs on the nation in step with its continued detention of American pastor Andrew Brunson, whom it accuses of involvement in Turkey's 2016 coup strive.
The Turkish government is trying to stabilize the lira, which has plunged over 40 percent against the United States dollar this year.
But analysts say the move will not be enough to quickly erase global investors' concerns, as the country has fundamental economic problems, such as a high level of debt owed in foreign currencies that has grown in size as the lira has fallen.
Economist Demir says, though, that the situation could have been far worse.
He also announced all business deals inside the country must now be conducted in lira with only exporters and importers allowed to come into contact with foreign currency.
Independent experts say Turkey should increase rates to help stem the selling pressure on the currency. In a bid to shore up the Turkish lira, Erdoğan's government issued a decree on Thursday banning the use of foreign currency in the sale and renting of property and the leasing of vehicles.
Erdogan also used his speech to attack the central bank for consistently missing its inflation targets, and faulted policy makers for failing to see what he considers to be the true relationship between the cost of credit and consumer prices.