China expected to keep benchmark lending rates steady amid flush liquidity

SHANGHAI, May 19 (Reuters) - China is expected to leave its benchmark lending rates unchanged for a 12th consecutive month in May, a Reuters survey showed, as ample interbank cash supplies reduced the need to cut rates despite weak economic and lending activities.

Market participants polled said the seven-day reverse repo rate, which serves as the anchor for loan prime rate (LPR) pricing, would remain unchanged, suggesting the People's Bank of China has little incentive to lower lending rates in the near term.

The LPR, normally charged to banks' best clients, is calculated each month after 20 designated commercial banks submit proposed rates to the National Interbank Funding Center.

In a Reuters survey of 24 market participants this week, all respondents predicted that at the next review on Wednesday, the one-year and five-year LPRs would remain steady at 3.00% and 3.50%, respectively.

"With interbank rates already running below the policy rate, the PBOC has little incentive to cut reserve requirement ratios or lower interest rates," analysts at Huachuang Securities said.

The average rate of overnight repurchase transactions (repos) in the interbank market - a gauge for cash conditions - has hovered around 1.2% over the past month, the lowest level since August 2023.

The PBOC reiterated a "moderately loose" policy stance, but unlike its fourth-quarter report, the latest quarterly policy implementation report released last week made no mention of cuts to reserve requirements or interest rates.

The U.S.-Israeli war on Iran has driven up commodity prices, pushing imported inflation risks onto the PBOC's radar, though markets widely believe this is not enough to shift the accommodative policy stance.

Ding Liang, an advisor to research firm Macro Hive, said the PBOC would remain committed to maintaining ample liquidity amid global energy and growth shocks. Weak credit demand and low bank funding costs are expected to cap long-term bond yields, he said.

China's growth lost momentum in April, with industrial output cooling and retail sales sinking to more than ?three-year lows as the world's second-biggest economy wrestled with higher energy costs from the Iran war and persistently weak domestic demand.

Unlike other parts of the world facing rising bond yields, China's domestic bond market has held up well due to its low correlation with global markets and minimal concerns over inflation.

China's producer prices blew past expectations to rise to a 45-month high ?in April, while consumer inflation also accelerated.

(Reporting by Shanghai Newsroom; Editing by Thomas Derpinghaus)