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February 8, 2017

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PBOC dismisses interest rate speculation

A recent increase of interest rates for open market operations was influenced by market forces and should not be viewed in the same way as benchmark interest rate rises, a central bank official said yesterday.

The People’s Bank of China raised the interest rates for reverse repurchase agreements by 10 basis points last Friday, triggering speculation that the move signaled an intention to raise benchmark interest rates.

The reverse repo rate rises were “mainly the results of a market-oriented bidding process” and “had major differences with increases of benchmark deposit and loan interest rates,” said Xu Zhong, head of the PBOC’s research bureau.

Reverse repos refer to a process by which the PBOC buys securities from banks through bidding with an agreement to sell them back in the future.

While the reverse repo rates were decided by market supply and demand, benchmark interest rate hikes reflect “a stronger government intention for proactive macro-control,” Xu noted.

China’s monetary policy in 2017 will be prudent and neutral, keeping an appropriate liquidity level but also avoiding excessive liquidity injections.

Xu added that both the scale and pricing of open market operations could change in line with monetary policy goals.

The PBOC yesterday halted open market operations for a third straight trading day, saying that liquidity in the banking system was relatively high.

Last month, the PBOC also raised the interest rates on its standing lending facility, a tool for it to provide short-term funding to banks.


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