China raises short-term rates in sign of monetary tightening

The People's Bank of China (PBOC) raised rates it charges in open-market operations and on funds lent via its standing lending facility as it shifts to reining in asset prices and inflation.
The People's Bank of China (PBOC) raised rates it charges in open-market operations and on funds lent via its standing lending facility as it shifts to reining in asset prices and inflation.PHOTO: REUTERS

BEIJING • China's central bank yesterday surprised the market by hiking short-term interest rates.

The People's Bank of China (PBOC) raised rates it charges in open-market operations and on funds lent via its standing lending facility (SLF) as it shifts to reining in asset prices and inflation.

The PBOC increased the costs of seven-, 14- and 28-day reverse repurchase agreements by 10 basis points each to 2.35 per cent, 2.5 per cent and 2.65 per cent respectively, according to a statement on its website. This is the first increase since 2013 for the two shorter tenures, and the first such move since 2015 for the 28-day contracts.

The SLF rate was increased to 3.1 per cent from 2.75 per cent, according to people familiar with the matter, who declined to be identified because they are not authorised to speak publicly.

The moves come just as cash demand is expected to ease after the week-long Chinese New Year holidays and follow an increase in rates on medium-term loans last week.

The PBOC is midway through a policy overhaul, with officials in the past signalling a corridor is evolving where repo rates guide the short end and SLF rates act as the ceiling.

"A rate hike on the first working day after the New Year holiday signals a new attitude," said Mr Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group in Hong Kong. "PBOC never makes it clear, but the seven-day reverse repo rate is the unofficial policy rate, a significant benchmark for interbank rates."

Mr Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale, said PBOC's move is "surprising and the tightening message is strong".

While balancing between economic growth and cutting leverage is an eternal game for policymakers, the latest moves show more willingness to sacrifice growth to control risks. Economist Tommy Xie of OCBC Bank in Singapore said: "Reining in risks is the priority."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on February 04, 2017, with the headline 'China raises short-term rates in sign of monetary tightening'. Print Edition | Subscribe