SHANGHAI/SINGAPORE (Reuters) -China's central bank rolled over maturing medium-term policy loans and kept the interest rate unchanged as expected on Monday, however markets expect authorities will need to unleash more stimulus to support slowing economic growth.
The economic recovery has lost momentum after an initial burst in the first quarter, prompting monetary authorities to lower key policy rates last month.
However, some market watchers now expect policymakers to deliver fiscal stimulus, as any further interest rate cuts would widen the yield gap with the United States, putting the yuan under more pressure.
The People's Bank of China (PBOC) said it was keeping the rate on 103 billion yuan ($14.43 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.65%.
Monday's market operations would fully meet financial institutions' cash demands and keep "banking system liquidity reasonable ample," the central bank said in an online statement.
In a Reuters poll conducted last week, market participants predicted no change to the MLF rate.
Traders and analysts said the rate decision was well expected after the central bank lowered key policy rates last month.
On Friday, a senior central bank official said that the PBOC would use policy tools such as the reserve requirement ratio (RRR) and MLF to help the world's second-largest economy withstand challenges.
Economists now expect more stimulus could be announced after the Politburo meeting later this month, when a top decision-making body of the ruling Communist Party meets to discuss the economy.
"We expect the July Politburo meeting statement to continue emphasising 'countercyclical adjustment' of monetary policy and 'more proactive' fiscal policy," economists at Goldman Sachs (NYSE:GS) said in a note.
"Specifically we expect a 25 bp RRR cut in Q3 and a 10 bp policy interest rate cut in Q4 to facilitate credit growth. Policymakers will probably also resort to faster government bond issuance in Q3 to help with investment growth in our view."
With 100 billion yuan worth of MLF loans set to expire this month, the operation resulted a net 3 billion yuan fresh fund injection into the banking system.
The central bank also injected 33 billion yuan through seven-day reverse repos and kept borrowing costs unchanged at 1.90%, it said in an online statement.
China is due to release due to release second quarter gross domestic product data at 0200 GMT.
($1 = 7.1403 Chinese yuan)