Market rates lifted in monetary tightening

China's central bank raised interest rates for open market operations by 5 basis points yesterday, following an interest rate hike by the US Federal Reserve.

China’s central bank raised interest rates for open market operations by 5 basis points yesterday, following an interest rate hike by the US Federal Reserve.

The People’s Bank of China conducted a seven-day reverse repurchase operation worth 10 billion yuan (US$1.6 billion), with the rate up from 2.5 percent to 2.55 percent.

As a monetary policy instrument, reverse repo rate is the rate at which the central bank borrows money from commercial banks. A rise in the rate will lead commercial banks to park more funds with the central bank, thereby decreasing the supply of money in the market.

The Fed on Wednesday raised the benchmark interest rate in the United States by 25 basis points and signaled two more rate rises in 2018, citing a “strengthened” economic outlook in recent months.

The PBOC said in a statement posted on its website that the move is “a normal reaction” to the US rate rise and it will also help to stabilize China’s leverage ratio.

The decision was the first of its kind after the new central bank Governor Yi Gang took charge this week.

The research team at Australia and New Zealand Banking Group believes that the rate-rise cycle will continue. ANZ said that given the current intensive deleveraging campaign and a likelihood of consumer inflation, China will continue to tighten its monetary policy under Yi’s leadership.

The rate rise also reflects Chinese policy-makers’ intention to ensure stability in the China-US interest rate spread and by doing so prevent potential capital outflows and foreign exchange instability, according to the ANZ.

China has vowed to maintain a prudent and neutral monetary policy in 2018 as it strives to balance growth and risk prevention.

China’s prudent monetary policy will remain neutral this year, with easing or tightening only as appropriate, according to the government work report this year.

Efforts will also be made to ensure a reasonable and stable level of liquidity, and increase the proportion of direct finance, particularly equity finance, according to the report.

Meanwhile, the Bank of Communications financial research center said it is not necessary to raise the country’s benchmark interest rate as China has seen a high level of marketization of its interest rates.

Lenders experienced a rise of their funding costs in 2017, while non-financial institutions and households also paid more for their borrowing from banks in the past year.

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