Turkish President Recep Tayyip Erdogan has railed against interest rates as "the mother and father of all evil" and believes that high rates lead to high inflation.
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.
The lira reacted strongly to the decision, rising by 5 per cent in value to 6.0 lira to the United States dollar.
The lira is down 38% against the dollar this year despite Thursday's slim gain.
Erdogan again described interest rates as a "tool of exploitation" but vowed that "we can not be taken advantage of".
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".
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.
The central bank and government have taken a series of measures to support the ailing currency, with Erdogan ruling early on Thursday that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currency. "A rate hike would be an important step to restore market confidence in the lira".
It said the policy would be "maintained decisively until inflation outlook displays a significant improvement".
Despite the comments, Erdogan added: "There has been no change in my sensitivities on the issue of interest rates". "If you say ´inflation is the cause, the rate is the result´, you do not know this business, friend", he added.
"Great decision - made all the more hard by the huge pressure on the central bank from Erdogan", said Bluebay Asset Management LLC strategist Tim Ash. They increased the cost of cash to commercial lenders by around 150 basis points last month by forcing them to use a borrowing tool costlier than the one-week repo rate.
Washington has imposed sanctions on two Turkish ministers and doubled tariffs on steel and aluminum imported from the country.