The bank raised the one-week repo rate to 24 percent, meaning it has now increased interest rates by 11.25 percentage points since late April, in an attempt to put a floor under the tumbling lira. The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.
The central bank said deterioration in pricing behavior continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.
"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", it added, explaining the hike.
Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".
Thursday's decree and Erdogan's remarks come after the lira's drastic fall in value against the U.S. dollar last month, during one of the worst diplomatic rows between North Atlantic Treaty Organisation allies Washington and Ankara.
TRT World's Turkey analyst Yusuf Erim has more.
The bank's decision came hours after Erdogan, a self-described "enemy of interest rates", reiterated his opposition to high interest rates and blamed Turkey's high inflation on the central bank's wrong steps.
In a decision announced earlier on Thursday, he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.
The next two Monetary Policy Committee meetings are to be held in October.
Currently, the interest rates are below the annual inflation level in Turkey.
There had been indications from the bank that it would raise rates after inflation came in at almost 18 per cent in August, according to official data last week. 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.
Relations with the USA deteriorated last month after Washington imposed sanctions on two Turkish ministers over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey.
"For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".