For more than two years, Erdogan has insisted on cutting interest rates despite skyrocketing inflation, pursuing a policy described as unconventional and at odds with the usual practice of raising rates in order to curb price increases.

After winning a third term at the end of May, Erdogan appointed Mehmet Şimşek, a former economist at Merrill Lynch, as finance minister and former Wall Street finance executive Hafiza Gada as central bank governors.

The markets considered the appointment of the new economic team in the Erdogan government as a sign of a shift in Turkey's policy towards traditional economic policies, which would support the local currency, restore foreign investment and limit the rise in prices.

All eyes were also on the meeting of the Turkish Central Bank today as the first test of the independence of its decision under the presidency of the new governor of the bank, Hafiza Arkan.

The Turkish central bank confirmed that the process of raising interest rates will be gradual.

Following the central bank's decision, the Turkish lira fell more than 2.5 percent to a new record high, as the interest rate hike fell well below expectations.

Turkey's loose monetary policies led to a big jump in inflation, which exceeded 85 percent in October last year, at the highest level in nearly a quarter of a century, before starting to fall below 40 percent in May for the first time in 16 months.

The Turkish lira has fallen to historic lows, a decline that has worsened following the election of President Erdogan last month as authorities loosen their grip on the currency.

After years of foreign investors, the Turkish government hopes that the move towards free-market policies and regulations will attract investment and money flows.

The central bank's net foreign exchange reserves fell to a record $5.7 billion last month before rising this month, reflecting how costly efforts to stabilize the lira are.