China's central bank is widely expected to partially roll over maturing medium-term policy loans on Monday, while keeping borrowing costs unchanged for the seventh month in a row, a Reuters survey showed.
Rising domestic inflationary pressure has further limited room for policy manoeuvre to support the economy slowly recovering from Covid-19 shocks, at a time that other major economies are raising interest rates aggressively.
In a poll of 32 market watchers this week, all respondents forecast no change in the interest rate on the one-year medium-term lending facility (MLF) , which stands at 2.85%.
Instead of having concern about borrowing costs, markets are anxious about whether the People's Bank of China (PBOC) would fully renew the 600 billion yuan ($89.04 billion) of such maturing loans on Monday.
Twenty-nine out of the survey participants, or 90.6%, said they predicted there would be a partial rollover, while the remaining three expected the central bank to fully extend the maturing loans.
Traders and analysts said the banking system was already flush with cash, with interbank money rates hovering at two-year lows and persistently below policy rates, so there was little need for the central bank to inject funds.
"Given the flush market liquidity, a rollover amount at or above 400 billion yuan shall be seen as supportive," said Frances Cheung, rates strategist at OCBC Bank in Singapore, noting MLF maturity is heavy this month.
Ming Ming, chief economist at CITIC Securities, said such cheap funding costs also encouraged bond market participants to build up leverage.
"Along with risks of a rebound in structural inflation, the central bank is expected to guide market costs higher and close to the policy rates and could result in a partial MLF rollover in August," Ming said.
The PBOC reiterated it would step up the implementation of its prudent monetary policy and keep liquidity reasonably ample, while closely monitoring domestic and external inflation changes, it said in its second-quarter monetary policy report.
"There is still limited room for reserve requirement ratio (RRR) cuts in Q4 as maturities of one-year MLF surge but with ample liquidity weighing on interbank market rates, the PBOC may also scale back on longer term liquidity injection," said Liu Peiqian, chief China economist at NatWest.
Liu said she had revised her opinion and now expected no more benchmark rate cuts this year.
The MLF rate now acts as a guide for the lending benchmark, loan prime rate (LPR), which is due for release on 22 Aug.