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 lira rallied 3 per cent to 6.18 against the dollar, having traded at 6.4176 beforehand. It later shed some of those gains but was still up almost three percent in value at 6.16 to the dollar after 1330 GMT.
"We can not allow the use of the tool of exploitation that is interest rates", Erdogan told a meeting in Istanbul on Thursday.
In a decision announced earlier on Thursday, he ruled that property sales and rental agreements must be made in lira, putting an end to such deals in foreign currencies.
He repeated however, his belief that interest rates should be cut, calling them an "instrument for exploitation".
It said: "Accordingly, the committee has chose to implement a strong monetary tightening to support price stability".
"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement". Late last month, South America's second-largest economy saw that rate jump to a staggering 60 percent in a bid to ease investor fears.
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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 described interest rates as a "tool of exploitation".
He has repeatedly blamed the central bank for high inflation, which hit nearly 18% last month, its highest level since 2003.
Anthony Skinner, director of Middle East and North Africa at Verisk Maplecroft, told AFP he believed the hike had already been agreed. By way of comparison, the Federal Reserve's much-debated rate hikes earlier this year nudged the rate just fractions of a percentage point to around 2 percent in the U.S.
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.
However, a diplomatic row with the United States and concerns about the president's influence on monetary policy have eroded investor confidence in Turkey in recent months.
"For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".