HONG KONG (BLOOMBERG) - China's central bank abstained from cutting a key policy interest rate, avoiding further policy divergence from the United States that could add pressure on the renminbi.

The People's Bank of China (PBOC) kept the rate on its one-year medium-term lending facility (MLF) at 2.85 per cent on Wednesday (June 15). Sixteen of the 22 surveyed by Bloomberg had predicted no change, while the rest saw a reduction of either 5 or 10 basis points.

The decision came hours before US officials may consider a hike of as much as 75 basis points, the biggest interest rate increase since 1994. Policy divergence from the US has wiped out China's yield premium over US Treasuries, sparking capital outflows and driving the renminbi lower.

China has refrained from aggressive monetary easing measures in recent months as interbank liquidity was ample amid sluggish corporate and consumer demand for credit. Policymakers have instead opted for more targeted lending tools and faster fiscal spending to bolster an economy grappling with a housing market slump and Covid-19 lockdowns.

The central bank on Wednesday rolled over the 200 billion yuan (S$41.4 billion) of the MLF loans maturing, in line with the forecasts of most economists polled. The funds will allow banks to buy more government bonds as a record 623 billion yuan worth of local notes will be issued this week to finance infrastructure spending, Bloomberg-compiled data shows.

The focus now shifts to a possible reduction in the loan prime rate on Monday. Banks reduced the de facto benchmark rate for long-term loans including mortgages last month after the PBOC lowered the floor for mortgage rates, though borrowing demand remained subdued in May.