January 23, 2020 / 4:05 AM / in a month

UPDATE 1-China c.bank keeps TMLF rate steady, pace of easing may moderate

* PBOC keeps 1-year TMLF rate unchanged at 3.15%

* PBOC drains a net 17 bln yuan via TMLF

* Spread between 1-year TMLF, MLF shrinks to 10 bps vs 15 bps previously

* TMLF may gradually fade out - analysts (Adds comments, details and background)

By Winni Zhou and David Stanway

SHANGHAI, Jan 23 (Reuters) - China’s central bank kept the interest rate on its targeted medium-term lending facility (TMLF) unchanged on Thursday, confounding expectations for a cut.

The rate on one-year TMLF loans was left at 3.15%, as it partially replaced loans maturing the same day, the People’s Bank of China (PBOC) said on its website. It had lowered the rate on the medium-term liquidity tool in November.

Recent signs of improvement in China’s economy and the signing of a U.S.-China trade deal have fuelled speculation over how much further the authorities will ease policy this year.

The central bank did not say why it kept the rate steady but attributed the loan rollover to cash needs at financial institutions.

The PBOC said it injected 240.5 billion yuan ($34.83 billion) worth of TMLF loans to some financial institutions, less than a 257.5 billion yuan batch of loans that were set to expire on Thursday.

“The volume reflects real demand for funds needed at the financial institutions who had borrowed TMLF loans a year earlier,” said Yan Se, chief economist at Founder Securities in Beijing.

“TMLF is gradually fading out. Steady interest rate should not affect liquidity operations in the future.”

DBS said in a report that a less tense external environment may allow for a more moderate pace of easing in the near term.

The PBOC cut the interest rate on its one-year MLF by 5 basis points in November for the first time since 2016 to prop up a slowing economy that was hurt by the Sino-U.S. trade war and weaker demand at home.

The MLF rate cut was followed by reductions of the same margin in 7-day and 14-day reverse repo rates, to keep the shape of the yield curve steady.

Similarly, some traders had expected the spread to be maintained between MLF and TMLF.

“The rate is unchanged meaning a narrower spread with respect to MLF rate. This gives the impression that the authorities may want to fade the use of TMLF, as the Loan Prime Rate (LPR) – together with MLF – should be the tool to guide loan rates,” said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore.

The gap between one-year MLF and TMLF is now 10 basis points from 15 bps previously.

MLF now serves as a guide for the new LPR lending benchmark.

The TMLF matures in a year but the banks can roll it over for two more years.

$1 = 6.9040 Chinese yuan Editing by Kim Coghill and Jacqueline Wong

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