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.
With this interest rate hike, Turkey has become the third country with the highest political interest rates after Argentina and Suriname.
The decision came after Turkey's central bank increased interest rates in efforts to stop the declining value of the lira.
The bank increased its one-week repo rate to 24%, a jump of 625 basis points that was nearly double what forecasters expected.
The central bank had drawn sharp criticism for failing to substantially raise interest rates to rein in double-digit inflation and an ailing currency. Erdogan warned on Friday that his patience with interest rates had limits.
Independent experts say Turkey should increase rates to help stem the selling pressure on the currency, as higher returns would entice global investors.More news: United States hurricane could kill 'a lot of people'
The US hit two Turkish ministers with sanctions over the detention of an American pastor and President Donald Trump doubled steel and aluminium tariffs on Turkey.
"The commercial banks were probably switching to more liquid assets, given what has happened to the lira", Jason Tuvey, a senior emerging markets economist at Capital Economics in London said by phone on Friday.
Turkey's annual inflation has jumped to almost 18 percent while economic growth has slowed to an annual rate of 5.2 percent in the second quarter, from the first quarter's 7.4 percent. On the basis of the new regulations, existing contracts now in foreign currencies will have to be converted to the lira within 30 days. "If you say "inflation is cause, the rate is the result", you do not know this business, friend", he added.
"The central bank will continue to use all available instruments in pursuit of the price stability objective", the central bank's monetary policy committee said in a statement.
Deniz Cicek, an economist at QNB Finansbank, said Turkey needed "an appropriate fiscal policy and structural reform agenda" that markets await to see in a medium-term plan to be outlined this month by Albayrak.
While acknowledging that the central bank is independent, he also criticized it, saying it had consistently miscalculated inflation targets, and he portrayed the currency crisis as a foreign conspiracy.
But Erdogan - who has been accused by critics of pressuring the nominally independent central bank - had earlier charged the bank with failing to control inflation and again aired his unorthodox view that low rates bring inflation down.