SHANGHAI (Reuters) - China kept a benchmark lending rate unchanged on Friday, defying expectations for a reduction with the economy jolted by the coronavirus pandemic although policymakers will likely need to loosen lending rates soon to free up funds.

The one-year loan prime rate (LPR) was left unchanged at 4.05% from the previous monthly fixing while the five-year LPR remained at 4.75%.

The surprise helped prop up the yuan against the dollar, following heavy selling this week, as the interest rate gap between China and the United States remained wide, following the Federal Reserve's surprise policy easing last weekend.

A majority of traders and analysts in a Reuters poll had expected the rate, which is used to price new loans, to come down given the massive co-ordinated stimulus unleashed by global central banks this week.

The fact that it did not suggests authorities are broadly comfortable with the current policy settings for now, analysts said, after the central bank last week cut the amount of reserves commercial banks are required to hold.

However, many see the need for more policy easing soon as economic risks grow.

"The lack of any cut this month means that the LPR is still only 10 basis points lower than it was at the end of last year, following a small cut in February," Julian Evans-Pritchard, senior China economist at Capital Economics said in a note.

"But with the economy unlikely to get back on track until next year, further monetary easing will be needed to help address the continued strain on corporate and households balance sheets."

The virus crisis has gradually stabilised in mainland China with no new domestic transmissions reported on Thursday for the first time, raising hopes that strict containment efforts to stop the spread of the virus are working.

But the situation overseas remains concerning. With over 242,000 infections and nearly 10,000 deaths, the epidemic has stunned the world and drawn comparisons with painful periods such as World War Two, the 2008 financial crisis and the 1918 Spanish flu.

Major global investment banks and institutions downgraded their forecasts for the Chinese economy. Goldman Sachs cut its estimate for first quarter GDP to a year-on-year contraction of 9% from a previous forecast of 2.5% growth.

PRESSURE ON BANKS

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August, loosely pegging it to the medium-term lending facility rate, or MLF.

The central bank left borrowing cost on its one-year MLF loans unchanged on Monday, which would ordinarily suggest the LPR would similarly remain unchanged.