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UPDATE 2-China keeps lending benchmark LPR steady but more stimulus expected

(Adds details and background)

SHANGHAI, Aug 20 (Reuters) - China left its benchmark interest rate unchanged on Friday for the 16th consecutive month but that did little to dampen expectations authorities will boost stimulus to counter a slowdown in the world’s second-largest economy.

China kept the one-year loan prime rate (LPR) at 3.85% and five-year LPR at 4.65%.

About 78% of traders and analysts polled by Reuters had predicted no change in either rate, but a minority had pencilled in a cut to the one-year tenor.

Data this week pointed to a sharp slowdown in factory output and retail sales growth in July, fuelled by high raw material costs, new COVID-19 outbreaks, and floods, as expectations build that policymakers may have to do more to support the recovery.

Economists expected Beijing to boost fiscal spending and keep liquidity in the financial system ample, while staying clear of any aggressive monetary easing that could run the risk of creating asset bubbles.

Xing Zhaopeng, senior China strategist at ANZ, expected another RRR cut later this year, after the People’s Bank of China (PBOC) delivered a surprise cut to banks’ reserve requirement ratio (RRR) in July.

“We expect the PBOC to adopt a measured approach and make targeted cuts (in the RRR) of 50 bps in Q4 2021 and Q1 2022, respectively,” Xing said.

“The MLF and relending will be the major tools to inject long-term liquidity while interest rates will be the primary tools of monetary policy.”

The PBOC also injected billions of yuan through medium-term lending facility loans (MLF) into the financial system earlier this week, which many market participants interpreted as an effort to prop up activity, although the cost of such borrowing was left unchanged for a 16th straight month.

“If the MLF rate remains unchanged, it’s hard for the LPR to move by itself,” said a trader at a Chinese bank.

Policy insiders told Reuters earlier in August that China is poised to quicken spending on infrastructure projects while the central bank supports the economy with modest easing steps.

Goldman Sachs economists said in a note this week such monetary and fiscal policy coordination can help provide a floor to growth.

“We expect fiscal spending to support growth in Q4, facilitated by liquidity provision from another RRR cut,” they said.

However, they added they did not expect policy rate cuts “because of ongoing efforts to rein in property prices, elevated PPI inflation (producer price inflation), and monetary policy transmission problems amid weak private demand.” (Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong and Ana Nicolaci da Costa)

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