The surprise move by the bank comes as Turkey has been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, which saw runaway inflation and the Turkish lira battered on currency markets in August.
The currency rose to touch 6.3673 per dollar, the highest since August 29.
Benchmark 10-year Treasury notes hit the psychologically significant 3 percent level for the first time in more than a month as prices on US government bonds fell on economic data that seemed solid enough to support plans by the Federal Reserve to raise rates another two times in 2018.
The latest rate hike could help ease fears that the central bank cannot act against Erdogan's wishes. 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.More news: Donald Trump claims '3,000 people did not die' in Puerto Rico hurricane
"The central bank is independent and makes its own decisions", he said.
The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.
There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.
"Accordingly, the Committee has chose to implement a strong monetary tightening to support price stability", it added, explaining the hike.More news: Andy Dalton throws 4 touchdown passes, Cincinnati Bengals beat Baltimore Ravens
The bank vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement" in the statement. For now though, this should provide the lira a much needed relief in the short-term.
Now Erdogan, long derided for his contrarian view that cutting rates slows inflation, is suddenly being lauded for allowing monetary authorities to follow orthodox prescriptions for common ills - all while enhancing his reputation as the defender of small businesses struggling with the rising price of money.
As part of Turkey's medium-term economic program, which Finance Minister (and Erdogan son-in-law) Berat Albayrak is scheduled to release this month, officials are expected to give a clearer indication as to how the country intends to escape from its plight of high private debt, slipping currency, high inflation and large current account deficit. 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.
The lira has plunged in recent weeks on concerns over domestic policymaking and a crisis in relations with the United States.More news: Dua Lipa's LGBT fans removed from concert after waving pride flag
The US hit two Turkish ministers with sanctions over the detention of US pastor Andrew Brunson and President Donald Trump doubled steel and aluminium tariffs on Turkey.
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