China’s central bank is likely to at least maintain current liquidity in the banking system on Monday (Jan 16) through its management of medium-term policy loans, while keeping borrowing costs unchanged for a fifth straight month, a Reuters survey showed.

The People’s Bank of China (PBOC) would be keeping an eye on routinely high pre-holiday cash demands of households and corporates, traders and analysts said. It would want to ensure there was enough liquidity for that purpose and also to boost the economy, which is recovering from Covid-19 shocks, they said.

This year, the week-long Lunar New Year holiday will begin on Jan 21.

The PBOC manages liquidity by extending loans to banks under its one-year medium-term lending facility (MLF). This month, 700 billion yuan (S$137.7 billion) of such debt is maturing.

Twelve analysts expected the central bank to replace that debt exactly with 700 billion yuan of new lending, and 10 expected it to go further and lend a greater amount. The other three participants expected only partial rollover of the maturing debt.

A great majority – 21 traders and analysts – expected the MLF interest rate to stay unchanged at 2.75 per cent this month, while the remaining four respondents expected a small rate cut.

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“As the 700 billion yuan of MLF maturity comes ahead of the Chinese New Year, a full coverage of the liquidity as a minimum is probably needed,” said Frances Cheung, rates strategist at OCBC Bank.

“But it is a matter of the use of instruments; if part of the liquidity is compensated for by short-term reverse repos, it would be a disappointment to the market.” Short-term reverse repos are another PBOC tool for managing liquidity.

Markets still expect some monetary policy easing measures to support economic recovery, including cuts to policy rates and the amount of cash that banks must set aside as reserves.

Slow credit demand, benign domestic inflation and a strengthening yuan should all allow further policy manoeuvre, they said.

“Subdued domestic price pressures mean that inflation will not be a constraint for monetary policy easing,” analysts at Commerzbank said in a note.

“The PBOC will likely cut interest rates soon to aid the expected economic recovery this year.”

The MLF rate serves as a guide to the country’s benchmark interest rates, the one and five year loan prime rates (LPRs), which will next be fixed on Jan 20. The MLF and LPR rates usually move together.

Some traders expect some monetary easing, probably a cut to the five-year LPR, to aid the wobbling housing sector, following a slew of recent stimulus measures.

“It is still possible that the PBOC will cut the MLF rate further by 10 basis points (bps) in Q1, leading to a further decline in the LPR, especially for the 5-year,” analysts at Standard Chartered said in a note.

“But more cuts beyond this level are unlikely as China banks’ net interest margin (NIM) has fallen to a record low.” REUTERS