SHANGHAI/SINGAPORE, May 14 (Reuters) - China's central bank is widely expected to leave a key policy rate unchanged when rolling over maturing medium-term loans on Wednesday, a Reuters survey showed.
A weak currency remains the main constraint limiting the authorities' monetary easing efforts, analysts and traders said, despite an unexpected credit contraction in April that has warranted more policy stimulus to prop up the world's second-largest economy.
In a Reuters poll of 32 market watchers conducted this week, 27, or 84%, of all respondents expected the People's Bank of China (PBOC) to leave the interest rate on the one-year medium-term lending facility (MLF) loans unchanged at 2.50% from the previous operation.
And the remaining five market participants projected a marginal interest rate reduction.
In addition, 24, or 75% of all respondents predicted that the central bank would partially roll over the maturing 125 billion yuan ($17.27 billion) worth of such loans.
"Given the changed market expectations on the U.S. Federal Reserve rate cut and strong U.S. dollar, we do not expect any MLF rate cut but see a likely lowering of the loan prime rate (LPR) by end of Q2, perhaps by 10-20 basis points," said Tao Wang, chief China economist at UBS.
China's yuan has lost 2% against a resurgent dollar so far this year, pressured by its relatively low yields versus other economies.
Meanwhile, some traders also said that demand for the MLF loans were also hampered by signs of loosening cash conditions in the banking system.
The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, stayed well below the MLF rate. It last traded at 2.0848%.
Still, markets are not ruling out some form of easing after the Communist Party's Politburo meeting in late April mentioned that China will step up support for the economy with prudent monetary and proactive fiscal policies, including cuts in interest rates and bank reserve requirement ratios (RRR).
Separately, with the finance ministry set to start long-awaited sales of long-term special treasury bonds later this week to help stimulate key sectors of the flagging economy, analysts expect the central bank to use MLF loan operations as part of its toolkit to cope with the issuance.
"The PBOC has alternative options to accommodate the acceleration of government bond issuance, such as MLF operations and potential Chinese government bond (CGB) trading, which, if implemented in scale, may lower the probability of RRR cuts," economists at Goldman Sachs said in a note.
They maintain their forecasts for two RRR cuts, with 25 basis points each in the second and the fourth quarter, in addition to a policy rate cut of 10 basis points in the third quarter of this year.
($1 = 7.2377 Chinese yuan)
(Reporting by Wu Fang and Winni Zhou in Shanghai, Tom Westbrook in Singapore; Editing by Jacqueline Wong)
