The dual developments on Thursday pushed the lira as high as 6.08 against the dollar and it traded flat on Friday morning, standing at 6.03 to the dollar at 07:28 GMT.
He has repeatedly blamed the central bank for high inflation, which hit nearly 18% last month, its highest level since 2003. It has still lost 38 per cent of its value against the USA currency this year.
Inflation ran at 17.9 percent in August, but the latest rate hike - while substantial for Turkey, especially under Erdogan - is too limited to counter such a figure.
The announcement in the government's official gazette stated that current agreements in foreign currencies must be changed to lira in 30 days, putting an end to deals in dollars and euros.
Turkish lira implied volatility gauges fell to their lowest in more than a month, as sentiment continued to improve.
The surprise move buoyed markets that had been mired in a slump for months, triggered by a diplomatic row with the United States and then amplified by central bank inaction.
There had been indications from the bank that it would raise rates after inflation came in at almost 18 percent in August.
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A "tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement", it 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.
Economists have argued the nominally independent bank has come under pressure from Erdogan who, only a couple of hours before its decision, launched a blistering attack on the bank and interest rates.
Guillaume Tresca, senior emerging market strategist at Credit Agricole said the economy needed to slow down because it was overheating and that an interest rate rise was needed to cap lira depreciation.
Currently, the interest rates are below the annual inflation level in Turkey.
"Obviously, it will have negative consequences on the economy but, I would say, it is less important if you have a hard landing than big corporate defaults due to a vicious cycle between (lira) depreciation and inflation", he said.
The bank later said funding would be provided via the policy rate, the one week repo auction rate, instead of through overnight lending from September 14.
It was not immediately clear if Erdogan had been aware of the central bank's decision when he made his comments.
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.