China likely to keep medium-term rate unchanged as RRR cut kicks in

SHANGHAI, Dec 14 (Reuters) - China's central bank is expected to fully roll over maturing medium-term policy loans but keep the borrowing cost unchanged for the fourth straight month on Thursday, a Reuters survey showed.

With the People's Bank of China's (PBOC) decision to lower the amount of cash banks must set aside as reserves coming into effect earlier this month, market watchers believe authorities have little motivation to ease monetary policy further to boost the economic recovery.

In a poll of 24 market watchers conducted this week, 20 participants predicted the PBOC would keep the interest rate on the one-year medium-term lending facility (MLF) unchanged at 2.75% on Thursday. The remaining four respondents expected a marginal rate cut.

However, the market was split over how much of its medium-term loans would roll over. A small majority of 14 participants forecast the PBOC to fully renew the 500 billion yuan ($71.85 billion) worth of maturing MLF loans. Among the other 10 traders and analysts, six believed that the central bank would inject fresh funds exceeding the maturity while four priced in a partial rollover.

"We believe interbank liquidity could be under some pressure as 2022 comes to an end, and PBOC may intend to increase long-term liquidity injection," said Mary Xia, China rates strategist at UBS Securities, expecting the PBOC to fully extend the expiring MLF loans.

Chinese companies usually have higher demand for cash for various payments and administrative requirements towards the year-end, which would suck money out of the banking system.

Some traders pointed out that credit lending rebounded in November, decreases the urgency for the central bank to stimulate demand.

However, others argued Beijing's most significant relaxation of its COVID-19 controls since the pandemic erupted three years ago could cause disruptions to broad economic activity.

"Clearly the risk to short-term growth is to the downside should Omicron spread in China," analysts at Morgan Stanley said in a note.

"It would have a negative impact on the services sector and consumption for 1Q or 2Q. As a result, the PBOC is likely to keep liquidity abundant to support growth." ($1 = 6.9586 Chinese yuan) (Reporting by Li Hongwei and Brenda Goh, Writing by Winni Zhou; Editing by Sam Holmes)