PBC in­creases key pol­icy in­ter­est rates

Global Times - Weekend - - TOP NEWS - By Xie Jun

China’s cen­tral bank on Fri­day raised seven-day re­verse re­pur­chase agree­ments (re­verse repos) rate – one of its key pol­icy rates – for the first time since 2013.

The in­crease is a fur­ther sign that the Peo­ple’s Bank of China (PBC) is mov­ing to a tighter pol­icy as the do­mes­tic econ­omy shows signs of im­prove­ment, ex­perts noted on Fri­day.

The cen­tral bank’s sur­prise de­ci­sion, which came on the first trad­ing day of the Chi­nese New Year, will see the seven-day re­verse repo rate in­crease by 10 ba­sis points to 2.35 per­cent.

The PBC also raised the rate for 14-day re­verse repos to 2.5 per­cent from 2.4 per­cent, and the 28-day open mar­ket op­er­a­tions rate to 2.65 per­cent com­pared with the pre­vi­ous 2.55 per­cent, ac­cord­ing to the PBC.

Re­verse repos is a process in which cen­tral banks pur­chase se­cu­ri­ties from banks with an agree­ment to re­sell them in the fu­ture.

Be­sides re­verse repos, the PBC also in­creased the lend­ing rates on its stand­ing lend­ing fa­cil­ity (SLF) short-term loans. SLF is a tool used by the PBC to give liq­uid­ity sup­port to pol­icy banks and com­mer­cial lenders.

The gov­ern­ment de­ci­sion to raise pol­icy in­ter­est rates comes af­ter fresh data pointed to­ward a strong eco­nomic re­bound since the fourth quar­ter of 2016.

“The re­bound­ing eco­nomic en­vi­ron­ment has pro­vided an op­por­tu­nity for the PBC to raise the pol­icy in­ter­est rates,” Liu Dongliang, a se­nior an­a­lyst at China Mer­chants Bank, told the Global Times on Fri­day.

Liu also noted that the in­crease on re­verse repo rate and SLF rate is a fur­ther re­flec­tion of the gov­ern­ment’s ef­forts on fi­nan­cial delever­ag­ing and con­trol­ling the sys­tem­atic risks in the fi­nan­cial sec­tor.

Ac­cord­ing to Liu, ru­mors have been cir­cu­lat­ing that large amounts of loans have been is­sued since the be­gin­ning of this year, and the PBC’s new poli­cies might be aimed at sup­press­ing fi­nan­cial in­sti­tu­tions’ lend­ing im­pulse.

Liu Xuezhi, an econ­o­mist with the Bank of Com­mu­ni­ca­tions, said that as the mar­ket ex­pec­ta­tions are ris­ing for the US gov­ern­ment to fur­ther raise the in­ter­est rates, the PBC is also forced to take syn­chro­nous mea­sures so as to lower the de­pre­ci­a­tion pres­sure on the yuan.

Pol­icy shift

Some over­seas me­dia have cited ex­perts as say­ing that the PBC’s de­ci­sion is an im­por­tant sig­nal that the cen­tral bank has shifted to­ward a “tight­en­ing bias.”

Ac­cord­ing to Liu Xuezhi, the gov­ern­ment has been low­er­ing the in­ter­est rates in the re­cent few years to boost do­mes­tic econ­omy, and the ef­fects of such a pol­icy have be­come vis­i­ble.

On the other hand, the side ef­fects of such a pol­icy have also ap­peared, such as over-devel­op­ment in the real es­tate sec­tor, and it’s time for the gov­ern­ment to make ad­just­ment in its mon­e­tary pol­icy, he told the Global Times.

Liu Dongliang pointed out that the in­ter­est rates in­creases on Fri­day are not “typ­i­cal” as the gov­ern­ment has not yet changed the bench­mark one-year de­posit and loan in­ter­est rates.

The last time the PBC ad­justed the bench­mark one-year in­ter­est rates was in Au­gust 2015, when it low­ered the de­posit and loan in­ter­est rates by 0.25 ba­sis points, re­spec­tively.

Liu Dongliang said that whether or not the PBC will con­tinue to tighten the mon­e­tary pol­icy will de­pend on whether fi­nan­cial lend­ing will con­tinue to ex­ceed gov­ern­ment ex­pec­ta­tions and whether the do­mes­tic econ­omy will main­tain its cur­rent trend.

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