China raises a key market interest rate, following Fed’s move
SHANGHAI: China gingerly raised a key short-term interest rate yesterday following the US Federal Reserve Bank’s move overnight, in a symbolic reminder that Beijing is keeping an eye on global market trends even as it cracks down on financial risks at home.
The People’s Bank of China ( PBOC) said it had increased the interest rate on 7- day reverse repurchase agreements, or reverse repos, used to control liquidity in the banking system, by 5 basis points ( bps).
The Fed raised US interest rates by 25 bps, or a quarter of a per centage point, on Wednesday and forecast at least two more hikes for 2018.
The PBOC’s move on Thursday had been widely expected and was the central bank’s first major policy decision under new Governor Yi Gang, who was appointed by parliament on Monday as part of a sweeping reshuffle of China’s cabinet under ever-stronger President Xi Jinping.
“I think it’s just a symbolic rate hike again to avoid the China-US rate spread from widening too much,” said Ken Cheung, senior FX strategist at Mizuho Bank in Hong Kong.
“A 5 bps hike is enough because yuan depreciation is not a big concern. And the PBOC is refraining from lifting rates aggressively amid the regulation reform and benign inflation pressure.”
The 7- day reverse repo rate was raised to 2.55 per cent from 2.50 per cent, while the PBOC injected 10 billion yuan ( US$ 1.58 billion) into the financial system, the central bank said in a statement.
Many market watchers had expected the PBOC to follow a Fed hike with a more modest 5-10 bps increase in the borrowing cost for Chinese interbank loans.
I think it’s just a symbolic rate hike again to avoid the ChinaUS rate spread from widening too much. Ken Cheung, Mizuho Bank senior FX strategist
While that would keep the USChina rate differential from getting too wide – which would risk a resurgence in capital outflows from China – analysts said the move was also a reminder to banks and other financial institutions that the government is pressing ahead this year with its campaign to reduce risks in the financial system.
The PBOC had similarly raised rates on its open market operations and medium-term lending facility by 5 bps after the Fed last increased its policy rate by 25 bps in December.
It began nudging up short-term rates in early 2017 as authorities’ clampdown on riskier financing practices kicked into higher gear, but it has moved cautiously to avoid a hit to the economy.
Yi, a former vice governor of the PBOC, took the helm from longserving governor Zhou Xiaochuan in a personnel move during parliament that analysts said signalled policy continuity.
Yi told reporters during the annual session of parliament, which concluded on Tuesday, that real economic conditions would determine whether China would raise rates or not.
With global markets expecting further monetary tightening in the United States, economists think China will follow suit with further increases of its market rates, although there is no clear consensus on how high rates may go.
Nie Wen, an economist at Hwabao Trust in Shanghai, expected the PBOC to raise market rates by a total of 25 bps this year, or possibly as much as 50 bps if consumer inflation in China rises above 3 per cent. — Reuters