China's central bank to further erode role of medium-term loan rate

BEIJING (Reuters) -China's central bank said it will change the way it sells its medium-term loans, a move that market participants say may further erode the significance of role of such a bond instrument in guiding monetary policy.

The People's Bank of China said it will issue 450 billion yuan ($62.03 billion) of one-year medium-term lending facility (MLF) loans on Tuesday.

And starting this month, MLF loan operations will be carried out by adopting a fixed-quantity, interest-rate bidding, and multiple-price bidding method, the PBOC said.

"The fixed volume, auction by bids is another step taken to fade the role of MLF rate as a policy guidance," said Frances Cheung, head of FX and rates strategy at OCBC Bank.

"The rates will now be determined by a price discovery process which will help policy maker to gauge market demand at different interest rate levels."

The adjustment will "keep banking system liquidity reasonably ample," the PBOC said in a statement, "and better fulfill differentiated funding needs at different institutions."

China's central bank has shifted to use the seven-day reverse repo rate as its main policy rate, and gradually faded the significance of interest rates on other bond tools.

A batch of 387 billion yuan in MLF loans was due to expire this month. Tuesday's operation is expected to inject 63 billion yuan on a net basis into the market to "help support market liquidity," OCBC's Cheung said.

China's central bank said on Friday that it will cut banks' reserve requirement ratio and interest rates at the "appropriate time," according to a quarterly meeting of its monetary policy committee.

($1 = 7.2542 Chinese yuan renminbi)

(Reporting by Beijing NewsroomEditing by Bernadette Baum)