China keeps one-year money market rate unchanged but easing still likely

China's central bank partially rolled over loans from its one-year liquidity facility on Tuesday but kept the lending rate unchanged, a sign it is willing to maintain adequate credit to support a slowing economy but wary of excessive stimulus.

While analysts considered it a measured move, many still expect the People's Bank of China to step up stimulus this week by guiding benchmark rates for new loans lower on Friday as central banks globally rush to loosen monetary policy.

The US Federal Reserve is widely expected to cut rates later this week, following renewed quantitative easing by the European Central Bank.

The People's Bank of China (PBOC) extended 200 billion yuan ($28.27 billion) of one-year medium-term lending facility (MLF) loans CNMLF1YRRP=PBOC on Tuesday as a batch of such loans - worth 265 billion yuan - matures. Meanwhile, a batch of seven-day reverse repurchase agreements, worth 80 billion yuan, also matures on the day.

The PBOC kept the one-year MLF rate unchanged, at 3.3%, reflecting an inclination to avoid loosening monetary policies too much, despite China's growing economic pressures.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered, said elevated pork prices due to African swine fever were the main factor holding the PBOC back from deeper policy easing.

"All other indicators show there is a strong case to cut rates, including real economic activity data yesterday which was a confirmation of downside risks," Ding said. "Looking forward, if a large part of US tariffs increases become effective, the downside risks downside risks are even bigger."

While the PBOC kept the MLF rate unchanged, analysts expect the Loan Prime Rate (LPR), which was designated the reference rate for new loans last month, to be set lower at the monthly fixing on Friday. The MLF rate, seen as banks' funding costs via the interbank market, is the reference banks use when setting LPRs, which are benchmarks for new loans. By reducing the MLF rate, PBOC can guide borrowing costs lower in the real economy.

The MLF rollover follows the PBOC's half-a-percentage-point cut in banks' required reserve ratio (RRR) took effect on Monday, releasing 800 billion yuan of liquidity into the banking system. The PBOC, which last week unexpectedly skipped a rollover of MLF loans, said on Monday liquidity levels were "relatively high."

"The PBOC may see the liquidity released via RRR cuts as providing enough liquidity to the market," said Frances Cheung at Westpac. "A stable MLF rate does not mean LPR cannot fall. There is downside to LPR given its spread over MLF and given the lower funding costs amid the RRR cuts."

Data released on Monday pointed to a deepening slowdown in China's economy in August, with growth in industrial production at its weakest in 17-1/2 years amid spreading pain from a trade war with the United States and softening domestic demand. Retail sales and investment gauges also worsened.

Premier Li Keqiang said in an interview published on Monday that it was "very difficult" for the economy to grow at 6% or more and that it faced "downward pressure".