This boosted investors' fears that the president - who wants to see lower borrowing costs to spur credit growth and construction - sought greater influence over monetary policy.
"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", the monetary policy committee statement said.
The lira firmed to 6.01 against the dollar following the decision, from more than 6.4176 beforehand.
The hefty 6.25 percentage point rise is the bank's latest attempt to stem the currency's collapse.
The next two Monetary Policy Committee meetings are to be held in October.
The main share index rose 2.1 per cent, with the banking index up 4.8 per cent. Dollar-denominated bonds issued by the Turkish government rose across the curve.
The bank implemented what economists described as a hidden interest rate hike in mid-August, forcing banks to borrow at the higher 19.25 percent through the overnight lending facility.
Erdogan previous year said the fund needed a "reorganisation" after the first chairman Mehmet Bostan was removed from his post in September 2017.
Turkish President Tayyip Erdogan has appointed himself chairman of the country's sovereign wealth fund and completely changed its board, naming Finance Minister Berat Albayrak as his deputy, the country's Official Gazette said on Wednesday.
"The Governing Council expects the key European Central Bank interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary", it said, repeating its guidance.
Neil Wilson, chief market analyst at Markets.com said: "This was a definite statement from policymakers, but the risk now is that the market tries to test the central bank's resolve: the horse may have already bolted".
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. "A rate hike would be an important step to restore market confidence in the lira".
He criticised the central bank, saying it had consistently miscalculated inflation targets and again portrayed the currency crisis as a foreign conspiracy.
He said Turkey also needed to resolve a dispute with the United States, which helped drive the lira to a record low of 7.24 against the dollar a month ago, and rebalance the economy away from big infrastructure projects and consumer spending.
In another bid to prop up the lira, Erdogan earlier on Thursday ordered by decree that property agreements in foreign currencies would not be allowed.