PBOC Raises 7-Day Repo Bid Rate 5BP Following Fed Rate Hike

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The Chinese central bank has raised its 7-day repo bid rate five basis points in the wake of the US Federal Reserve’s widely anticipated rate hike.

The US Fed has just raised its benchmark overnight lending rate by 0.25 percentage points to a range of 1.5 – 1.75%, as well as lifted its estimated longer-term “neutral” rate, which refers to the level at which monetary policy has no impact on economic growth.

The Fed also hinted at two further rate hikes later this year, followed by accelerated increases during the period from 2019 – 2020.

In response to the state-side rate hikes, the People’s Bank of China has raised the bid rate for its 7-day repos five by basis points to 2.55%, for the first increase since December last year.

The increase is smaller than that anticipated by analysts, who expected PBOC to follow up a US rate hike with a 10 basis point increase.

A senior official from PBOC’s open markets operations office said that “this modest rate hike is in consonance with market expectations, and is a normal response of the market to the US Federal Reserve’s recent rate hike.”

“Since last year money market rates have remained higher than OMO rates, and while there has recently been a narrowing there is still a significant rate’s gap.

“This OMO rate rise following a modest increase on the market reflects the supply and demand relationship for funds, and can further narrow the interest rate differential between the two.

“This is of benefit to strengthening the ability of OMO rates to guide money market rates, and is also of benefit to market actors forming rational interest rate expectations and restraining irrational financial conduct, and will play a significant role in stabilising macro-leverage.

“At the same time, since the start of the year PBOC has strengthened anticipatory adjustments, micro-adjustments and management of expectations, and will maintain the rational stability of banking system liquidity, engage in appropriate loosening and tightening, and guide rational growth in money, credit and total social financing.

“In combination with a modest increase in OMO rates, this is of benefit to creating an appropriate monetary and financial environment for supply-side structural reforms and high-quality growth.”

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