(Adds analyst comments in paragraphs 8-9)
SHANGHAI/SINGAPORE, Nov 15 (Reuters) - China's central bank ramped up liquidity injection but kept the interest rate unchanged when rolling over maturing medium-term policy loans on Wednesday, matching market expectations.
Market participants believe that a weakening Chinese yuan has constrained the central bank's efforts to aggressively lower interest rates even though the recovery of the world's second-largest economy remains uneven and requires further stimulus.
The People's Bank of China (PBOC) said it was keeping the rate on 1.45 trillion yuan ($199.92 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.
The central bank said the loan operation was meant to maintain banking system liquidity reasonably ample to counteract short-term factors including tax payments and government bond issuance.
"At the same time, it will appropriately provide mid- and long-term base money," the PBOC said in an online statement.
All 31 market watchers polled by Reuters this week had expected the central bank to inject fresh funds to exceed the maturity.
With 850 billion yuan worth of MLF loans set to expire this month, the operation resulted a net 600 billion yuan of fresh fund injection into the banking system.
"Weak inflation and the recent liquidity squeeze call for stronger policy support this week," Carlos Casanova, senior economist for Asia at UBP, said in a note this week.
"Liquidity conditions tightened in October, as a deluge of bond issuance to fund fiscal stimulus and quarter-end cash demand from corporates drove up interbank rates. The most likely outcome is for PBOC to inject more support through open market operations, while leaving the MLF rate unchanged."
He added that authorities will remain on alert and continue to support the recovery, expecting another 10-basis-point interest rate cut and an additional RRR cut in December, if not sooner.
The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measure short-term inter-bank borrowing costs, is hovering at a six-month high of 2.5653%, about 7 bps higher than the MLF rate the central bank charges financial institutions.
Wednesday's liquidity support for the nascent economic recovery through the medium-term policy loans has, however, reduced necessity for more imminent monetary stimulus, some traders and analysts said.
"But MLF loans is rather expensive, and we still expect additional reserve requirement ratio (RRR) cuts in the future to reduce (banks) debt costs," said Xing Zhaopeng, senior China strategist at ANZ.