Chinese Central Bank Says to Focus on Rates not Volume When Interpreting Monetary Policy Signals

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The People’s Bank of China (PBOC) has reiterated the importance of looking at rates and not scale when reading the tea leaves of its open market operations (OMO) for clues as to Chinese monetary policy trends.

A report from PBOC’s official media publication Financial News said that “at present excessive attention should not be given to the volume of central bank operations, otherwise this can lead to misinterpretation of monetary policy trends.”

“The focus of attention should instead be given to the interest rates for central bank open-market operations, medium-term lending facility (MLF) rates and other policy rate indices, as well as the conditions of market benchmark rates over a given time period.”

Domestic analysts say PBOC has recently been transitioning towards a price-based model for monetary policy adjustments, as part of efforts to gradually improve the central bank policy rate system.

In its 2020 Monetary Policy Execution Report PBOC recommended first looking at any changes to policy rates in order to assess short-term interest rate trends – in particular any changes to its 7-day repo rates, instead of focusing too much on the scope of OMO.

“OMO volume will be flexibility adjusted on the basis of multiple provisional factors such as fiscal and cash conditions as well as market demand conditions,” said PBOC. “Such changes do not at all reflect market interest rate trends, and do not reflect changes to central bank policy rates.”

“At present the central bank is gradually strengthening the usage of price-based adjustment tools, and for this reason the significance of signals from price-based instruments as represented by policy rates is becoming stronger,” said Zhou Guannan (周冠南), chief fixed-income analyst with Huachuang Securities, to 21st Century Business Herald.

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