SHANGHAI China left its benchmark lending rates unchanged as expected at the monthly fixing on Friday.

Persistent deflationary pressure and tepid credit demand call for more stimulus to aid the broad economy, but narrowing interest margin on the back of fast falling yields and a weakening yuan limit the scope for immediate monetary easing.

The one-year loan prime rate (LPR) was kept at 3.10%, while the five-year LPR was unchanged at 3.60%.

In a Reuters poll of 27 market participants conducted this week, all respondents expected both rates to stay unchanged.

China's central bank urged financial institutions to guard against interest rate risks when trading in bonds, signalling discomfort among policymakers over recent frenzied buying that has helped drive yields sharply lower.

The Politburo said earlier this month that China will adopt an "appropriately loose" monetary policy next year, the first easing of its stance in some 14 years, alongside a more proactive fiscal policy to spur economic growth.

Widening yield spreads against the US pressured the yuan to the weakest in more than a year. The gap between China's benchmark 10-year government bonds and their US counterpart widened to the largest in 22 years.

China has room to further cut the reserve requirement ratio, with the average RRR now at 6.6%, a central bank official recently said.

Tommy Xie, head of Greater China research at OCBC Bank

"The monetary policy stance will shift to being moderately loose, marking a significant departure from the prudent monetary policy regime in place since 2011."

"We anticipate the PBOC will lower the one-year LPR by 40 basis points in 2025 and reduce the RRR by an additional 100 basis points, providing substantial liquidity support to the economy."

Analysts at Golden Credit Rating

"We expect the central bank to cut the RRR by 0.25-0.5 percentage points by the end of the year to free up 500 billion yuan to 1 trillion yuan of funds ... It can also take into account the liquidity arrangements for the Lunar New Year."

The week-long Lunar New Year holidays in 2025 will start from Jan 28.

  - Reuters