The Turkish Central Bank announced the increase despite fears from President Recep Tayyip Erdogan – an avowed “enemy of interest rates” – was putting pressure on the bank to keep rates on hold.
It has now increased interest rates by 11.25 percentage points since late April as it struggles to bring the lira out of freefall.
The bank is also fighting a losing battle against inflation with annual consumer price inflation hitting 17.9 percent last month, its highest level since late 2003.
Turkey’s economy has been in trouble since Mr Erdogan swept to a fourth term in office in a victory that handed him greater powers including more influence on the country’s monetary policy.
The monetary policy committee said deterioration in pricing behaviour continued to pose upside risks on the inflation outlook, despite weaker domestic demand conditions.
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It said: “Accordingly, the committee has decided to implement a strong monetary tightening to support price stability.”
Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment, said: “It is pleasing to see common sense prevail.
“Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical.”
The lira has lost 40 percent of its value against the US dollar this year over concerns about Mr Erdogan’s influence and a diplomatic spat between Ankara and Washington but firmed to 6.01 following the interest rate decision, from more than 6.4176 beforehand.
Before today’s interest rate decision, Mr Erdogan announced he was banning the use of foreign currencies in property sales, rental contracts and leasing transactions and ruled all such transactions must now be made in lira.
He also announced all business deals inside the country must now be conducted in lira with only exporters and importers allowed to come into contact with foreign currency.
The president said: “We are solving the issue of rent in foreign currency, which concerns a lot of our vendors, once and for all. Every business in this country needs to be priced, discussed and carried out with our own currency.”
Economists and business analysts said the ruling was unlikely to have any permanent positive impact on the Turkish economy.
Cem Baslevent, economics professor at Istanbul Bilgi University, said: “The decision did not say what level should be taken for the new contracts, neither identifies what price index will be used for future price hikes, paving the way for potential disputes between the sides of a contract.
“Such hasty decisions would not have a positive impact on the Turkey perception of foreigners either.”