The surprise move by the bank comes as Turkey has been battling through one of the most troubled periods for its economy under the rule of President Recep Tayyip Erdogan, which saw runaway inflation and the Turkish lira battered on currency markets in August.
The lira traded at 6.0723 per dollar, well off its record low of 7.24 reached a month ago.
"We have faced a heinous attack targeting the Turkish economy after a series of negative statements from the U.S. about our country were used as an excuse", said Erdogan, calling the collapse of the national currency against the dollar "an economic assassination attempt".
The lira traded flat on Friday before Erdogan's remarks, holding the gains it made against the United States dollar on Thursday after Turkey's central bank increased interest rates and the government banned the use of foreign currencies in the country's property market.
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.
Earlier in the day, Erdogan published an executive decree that forces contracts between two entities in Turkey to be made in liras rather than foreign currencies.
The surprise move buoyed markets that had been mired in a slump for months, triggered by a diplomatic row with the U.S. 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 per cent in August, according to official data last week.More news: Tottenham vs. Liverpool: 5 players who could decide the outcome
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The bank said on Thursday that inflation developments pointed "to significant risks to price stability" due to the recent fall in value of the lira.
But Neuteboom of ABN Amro said much more was needed for Turkey to turn around "the negative spiral" the economy is in. The bank 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. "If you say ´inflation is the cause, the rate is the result´, you do not know this business, friend", he added.
"The central bank is independent and makes its own decisions", he said.
Key rates are now at their highest level since 2004, around a year after Erdogan first came to power.
Currently, the interest rates are below the annual inflation level in Turkey.
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.
Turkey's currency and inflationary troubles are also compounded by the threat of steel and aluminium tariffs from the USA as well as sanctions over the detention of an American evangelical pastor.