China raises interest rates hours after FED hike
December 19, 2017 Category China News Round-up, Weekly
The People’s Bank of China (PBOC) has raised its interbank policy rates by 5 basis points on December 14, hours after the Federal Reserve (FED) hiked the U.S. benchmark. By raising the rates, the central bank is charging banks a higher price on loans. The central bank raised the 7-day reverse repo rate, a liquidity management tool, to 2.5%, while the 28-day reverse repo rate was increased to 2.75%, according to an online statement released by the PBOC. It is the first hike of its kind since March, when the Chinese central bank responded to a similar move in the U.S.
Hong Hao, Chief Strategist at BoCoM International in Hong Kong, said the PBOC was forced to announce a less eye-catching interest rate because an increase in benchmark deposit or lending rates would be too dramatic. “It’s hard for China to touch benchmark rates because it conveys a strong signal of policy loosening,” said Hong. The central bank tried to play down the move. In a statement, the PBOC said the 5 basis-point increase is more of a market response to the FED’s decision instead of a central bank act. “The small rise in interbank policy rate will help narrow the gap with the market rates, change the market distortions and improve monetary policy mechanisms,” it said.
China will likely tighten monetary policy next year while increasing policy flexibility to ensure sufficient credit supply and to prevent overtightening from hurting the economy, economists said after the U.S. Federal Reserve rate hike. Some analysts forecast the PBOC will raise benchmark rates in 2018. Others expressed concern about the risk of overtightening given slower growth prospects next year.
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