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.
"It is pleasing to see common sense prevail", said Aberdeen Standard Investments Head of Emerging Market Debt, Brett Diment, of the rate rise.
"Hiking today does get Turkey on the slow road to recovering some monetary policy credibility, and that is critical".
The bank vowed the tight stance in monetary policy would be "maintained decisively until inflation outlook displays a significant improvement" in the statement.
"Accordingly, the Committee has made a decision to implement a strong monetary tightening to support price stability", it added, explaining the hike.
Following the CBRT's announcement, the Turkish lira strengthened to 6.0151 against the US dollar from a 6.45 level, gaining almost 5 percent. It has lost around 40 per cent of its value this year.
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.
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While the lira's plight has made it "rational to expect at least 1000 basis points" added to interest rates, opposition to higher borrowing costs among Turkish officials made a smaller increase more realistic, Rabobank currency strategist Piotr Matys said before the decision.
In a speech to a traders' confederation in the capital, Ankara, Mr Erdogan said on Thursday that nobody should carry out business in foreign currency apart from exporters and importers. "A rate hike would be an important step to restore market confidence in the lira". The rate hike could squeeze growth further, but independent experts say it is needed to contain inflation of about 18% and support the currency.
Piotr Matys at Rabobank said Turkey also needed to resolve its trade dispute with the United States and rebalance the economy away from big infrastructure projects and consumer spending.
Mr Erdogan, who has called himself an "enemy of interest rates", chose his son-in-law, Berat Albayrak, as finance minister in July.
The increase, which was higher than expected, boosted the lira by five percent against the dollar and may ease investor concern about Erdogan's influence on monetary policy.
Erdogan has cast the lira crisis as an "economic war" targeting Turkey and has repeatedly urged Turks to sell their dollar savings to shore up the lira.
He also decreed that local property sales, rental contracts and leasing transactions could no longer be conducted in foreign currency, in a fresh bid to buttress the flagging lira.