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December 15, 2017

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PBOC increases rates for open market operations

THE interest rates for China’s open market operations rose by 5 basis points yesterday, following the interest rate hike by the US Federal Reserve on Wednesday.

The operations included 30 billion yuan (US$4.54 billion) of seven-day reverse repos, with the interest rate up from 2.45 percent to 2.5 percent, and 20 billion yuan of 28-day reverse repos, with the rate up from 2.75 percent to 2.8 percent, the People’s Bank of China said on its website.

The PBOC also injected 288 billion yuan via one-year medium-term lending facility, with the interest rate up from 3.2 percent to 3.25 percent.

The central bank said it aimed to offset the impact on market liquidity from tax payments and maturing MLF later this month, and meet the seasonal liquidity needs of banks near the year end.

To meet the strong liquidity demand, the PBOC has provided total funds of 870 billion yuan through 28-day and two-month reverse repos since the end of October.

The PBOC has also made arrangements for significant cash demands before the Spring Festival, an important Chinese traditional festival which will fall on February 16, 2018.

The liquidity supply in the banking system near the New Year and Spring Festival is guaranteed, the PBOC said.

Since the beginning of this year, rates for reverse repos and MLF have increased three times by a total of 25 basis points.

“The increases reflected market supply and demand changes, and represented the market’s normal response to the US Fed’s rate hike,” according to a PBOC statement, citing an official in charge of open market operations.

The interest rates for open market operations are market-oriented and formed through bidding. Near the end of the year, strong liquidity demand in the banking system led to active bidding and thus higher interest rates, the official said.

A 5-basis-point rise is lower than expected, but “is conducive to forming reasonable interest rate expectations, avoiding excessive increases in leverage ratio and credit expansion of commercial banks,” the official said.

The official added the rises will narrow the gap between open market operations and money market rates, helping fix market distortion and making monetary policies more effective.

The Fed on Wednesday raised the benchmark interest rate by 25 basis points, the third increase in 2017.

The PBOC has relied on open market operations for liquidity, rather than cuts in interest rates or reserve requirement ratios.


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