China's IRS little changed after inflation eases to 20-month low

* Annual inflation was 3.2 percent in February

* Market focuses on future inflation situation

* Key money rates marginally changed, funds still ample

By Chen Yixin and Jacqueline Wong

SHANGHAI, March 9 (Reuters) - China's interest rate
swaps (IRS) were little changed on Friday after consumer price
inflation eased to a 20-month low in February, while the
short-term lending rate hovered at relatively low levels due to
ample liquidity.

China's CPI was up 3.2 percent in February from a year
earlier, slightly lower than a Reuters poll of 3.4 percent. The
index rose 4.5 percent on year in January.

Dealers said the market had largely expected the inflation
rate to fall sharply in February due to base effects, as Lunar
New Year last year was in that month, while this year it came in
January. But market players remained concerned about future
inflation.

"This slump is in line with our forecast," said a dealer at
an Asian bank in Shanghai. "But the reason for the slump is
largely because of the holiday effect, so we will pay more
attention on future data."

Beijing's 2012 target for inflation is 4 percent and
February's inflation outcome means the government has room to
ease monetary policy as economic growth slows.

The benchmark five-year IRS fell 3 bps to 3.32
percent by midday while the one-year IRS was down 2
bps at 3.14 percent.

But dealers said they did not expect an interest rate cut in
the near term due to uncertainties in the domestic economy,
persistent worries over Europe and slower global growth.

"IRS has little potential to fall sharply and could move
around recent levels because of these uncertainties," the Asian
bank dealer said.

However, ample liquidity in the market could affect the IRS
rate, while the weighted-average seven-day bond repurchase rate
stood around a 10-month low, dealers said.

In the money market, the lending rates was mixed on Friday.
The short-term repo hovered around low levels on ample
liquidity, while worries over month-end funds caused the 14-day
repo to rebound.

The weighted-average seven-day bond repurchase rate
was at 2.9837 percent at midday, higher than
Thursday's 2.9434 percent. The rate was still below 3 percent in
January 2011. The 14-day repo rebounded 14.16
basis points to 3.7401 percent.

Current Prev close Change

(pct) (bps)
7-day repo 2.9837 2.9434 + 4.00
7-day SHIBOR 2.9683 2.9325 + 3.58
Note: Repo rate is weighted average.

(Editing by Richard Borsuk)