SHANGHAI (Reuters) - China's central bank extended fresh short- and medium-term loans on Wednesday but kept the borrowing cost unchanged, as it seeks to maintain adequate liquidity in a slowing economy and ease a potential crunch ahead of the Lunar New Year.
The People's Bank of China (PBOC) said on its website the interest rate on one-year MLF loans <CNMLF1YRRP=PBOC> remained at 3.25%, unchanged from the previous operations. It injected 300 billion yuan (33.42 billion pounds) via the liquidity tool.
Separately, the PBOC also extended 100 billion yuan of 14-day reverse repos with the interest rate unchanged at 2.65%.
There is no maturing MLF loan or reverse repo on Wednesday.
In a statement, the central bank said the injection was meant to "offset impact from factors including tax payment and cash demand" and ensure that banking system liquidity was "reasonably ample" before the week-long Lunar New Year holidays kick off next Friday.
Rising cash demand from companies and households for the Lunar New Year holiday, a flood of special bond issuance by local governments and corporate quarterly tax payments have all combined to drain funds from the banking system. Some analysts expect the liquidity gap could amount to as much as 2.8 trillion yuan.
The MLF now acts as a guide for the PBOC's new lending benchmark Loan Prime Rate (LPR), with the monthly fixing due next Monday.
"While MLF rate can serve as guidance for LPR, an adjustment in the LPR is in theory possible with or without an MLF rate cut," said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore.
"We continue to see each monthly LPR reset as presenting an opportunity for a baby-step 5 basis point cut. We expect more open market operations injections in the next few days. Market reaction should be muted as liquidity injections have been expected to cover demand."
The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR last August. Since then, the one-year LPR <CNYLPR1Y=CFXS> has been lowered by a total of 10 basis points in an attempt to lower corporate borrowing costs and support an economy partly hurt by the U.S.-China trade war.
China is expected to post its slowest economic growth in 30 years in 2020 as domestic and global demand remain sluggish, a Reuters poll showed this week, reinforcing views that Beijing will roll out more support measures.
The volume-weighted average rate of the benchmark seven-day repo <CN7DRP=CFXS> traded in the interbank market, considered the best indicator of general liquidity in China, was 2.6918% as of 0223 GMT, up 0.5 basis points from the previous day's closing average rate.
(Reporting by Winni Zhou and Andrew Galbraith; Editing by Tom Hogue & Shri Navaratnam)