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.
Uncertainty around the global outlook for trade was highlighted by the European Central Bank, which on Thursday kept policy unchanged as expected and warned that risks from protectionism were gaining prominence.
The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand. "How can the private sector invest in such high interest rates?" he asked, adding that such margins were only made by drugs dealers.
Turkey is battling double-digit inflation, which surged to almost 18 percent in August, and a meltdown in the lira which hit a record low of 7.24 against the US dollar a month ago.
Erdogan, a self-styled "an enemy of interest rates", has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira. In August, the bank tightened liquidity to counter the lira's slide, shifting funding from repo auctions to the upper band of its interest rate corridor - raising the effective cost of funding by 150 basis points to 19.25 per cent.
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Erdogan also noted that Turkish exporters should take advantage of the current levels in foreign exchange rates to increase the volume of exports, and production and employment as well.
Apparently not ruling out further rate hikes, it vowed to "use all available instruments in pursuit of the price stability objective". "By saying the central bank is independent while criticizing it for misguided policies, Erdogan is pointing the finger of blame at the central bank".
He earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.
The interest rate decision was eagerly awaited. You see that in mid-year, it revises the inflation rates.
"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.
Purchase, sales and rental contracts of moveable and immovable properties and vehicle leasing made in foreign currencies will be converted into Turkish lira within 30 days, according to the decree.