SHANGHAI/SINGAPORE (Reuters) - China's central bank is expected to keep rates on its medium-term policy loans unchanged on Tuesday, a Reuters survey showed, despite fresh signs the economic recovery is losing momentum.
Tumbling credit growth and rising deflation risks in July have called for more monetary easing measures to arrest the slowdown, market watchers said, but a weakening Chinese yuan has constrained the central bank's efforts to imminently ease policy.
"MLF rate cuts are seen as less likely at this juncture given the weakness in the yuan – USD/RMB is currently attempting to make a fresh year-to-date high," analysts at HSBC said in a note.
In a poll of 26 market watchers conducted this week, 20 participants, or 77%, predicted that the central bank would leave the interest rate on its one-year medium-term lending facility (MLF) loans unchanged when it is due to roll over 400 billion yuan ($55.11 billion) worth of such maturing loans on Tuesday.
The remaining six traders and analysts in the survey all expected a marginal rate reduction.
The People's Bank of China (PBOC) last lowered the rate by 10 basis points to 2.65% in June. Retail sales, industrial output and investment data due on Tuesday will provide more clues on the direction of borrowing costs.
The yuan has lost about 5% to the dollar so far this year to become one of the worst performing Asian currencies. [CNY/]
China remains an outlier among global central banks as it has loosened monetary policy to shore up a stalling recovery but further rate cuts will widen the yield gap with the United States, putting more pressure on the yuan and risking outflows.
"We believe more pro-growth policies are warranted to support the economic growth, and further easing in monetary policy can be expected," analysts at BofA Global Research said.
"That said, as policymakers vowed to 'ensure the exchange rate is basically stable at a reasonable and balanced level' during July's Politburo meeting, we see limited space for significant monetary easing in the near term."
They expect a 15-basis-point cut in one-year loan prime rate (LPR) in total in the third quarter of the year. A reserve requirement ratio (RRR) cut was also a possibility to help restore credit demand.
The MLF rate serves as a guide to the LPR and markets mostly use the former as a precursor to any changes to the lending benchmarks.
In derivatives market, one-year interest rate swaps, a gauge that measures investor expectations of funding costs in the future, fell to 1.90% on Monday, the lowest since October 2022, suggesting some market participants are pricing in further rate reductions.
($1 = 7.2581 Chinese yuan)