Turkey is struggling to cool a booming economy with an unorthodox policy mix that has shied away from sharp rises in interest rates that would strengthen the lira currency. So far loan growth remains high.
"We expect the central bank (CBRT) to stay on hold today on the reserve requirement and policy rate fronts. Yet we believe that overnight lending rate would be hiked by 100 basis points to 10 percent from 9 percent," analysts at Is Invest said in a note.
"By hiking the lending rate the central bank might try to boost the costs to banks," Is Invest added.
Others speculated the central bank may again increase banks' required reserve ratios after holding them last month, as it feel increasing pressure to slow an overheating economy where loans are still expanding an annual 35 percent.
Emerging markets have taken a hammering in recent months from concerns over a possible debt default by Greece. But Turkish assets have suffered more due to fears about inflation, overheating and the central bank's strategy.
By 0710 GMT the benchmark Feb 20, 2013 bond yield stood at a 13-month high of 9.23 percent, climbing from a close of 9.15 percent on Wednesday.
The bank will give the results of its meeting at 1100 GMT.
"There is a risk of further changes to reserve requirement ratios (RRR). In the event of a hike in these, bonds are anticipated to come under some pressure. However, a further change in RRR may not in itself have a lasting impact on bonds," analysts at Tradition Analytics said.
"It is possible that banks have been borrowing the funds needed to shore up required reserves directly from the central bank via one-week repo auctions," the note added.
The benchmark bond yield started 2011 at a level of 7.06 percent, but has risen steadily this year as banks were forced to sell bond holdings to meet higher reserve requirements and as investors, fearing the central bank is falling behind the curve by holding rates at a record low, avoid Turkish assets.
All 12 analysts polled last week by Reuters expected no change to the policy rate, at a record low of 6.25 percent since January, although three expected banks' required reserve ratios (RRRs) to be increased.
The lira weakened to 1.6230 to the dollar from a previous close of 1.6150.
The main Istanbul share index fell 1.01 percent to 60,619 points, underperforming the emerging markets benchmark index which fell 0.54 percent.
Last month the Turkish central bank's monetary policy committee held its policy tools and said its "tightening" had started to take effect.
COPYRIGHT REUTERS, 2011