Comment rebuts speculation that govt intends to reverse monetary policy
A central bank official said Tuesday that the government raised rates for reverse repurchase agreements (reverse repos) in response to market forces, the Xinhua News Agency reported.
"[The rates are] subject to the influence of capital supply and demand in the market," said Xu Zhong, director of the People's Bank of China's (PBC) research bureau, according to the report.
Xu made the statement after speculation emerged that the rate increase signaled that the government intends to tighten monetary policy, reversing the policy trend of the last few years.
On Friday, the PBC raised the seven-day reverse repo rate, one of its key policy rates, by 10 basis points to 2.35 percent. It was the first time the central bank has raised the rate since 2013.
The PBC also raised the rate for 14-day reverse repos to 2.5 percent from 2.4 percent, and the 28-day open market operations rate to 2.65 percent from 2.55 percent.
Reverse repos are contracts in which the central bank purchases securities from banks on the condition that the banks buy them back after a specified amount of time, such as seven days.
On Friday, the PBC also increased the lending rates for its standing lending facility (SLF) short-term loans.
Tan Yaling, head of the China Forex Investment Research Institute, said that an increase of the reverse repo or the SLF rate does not indicate the direction of the government's monetary policy, because it's not adjustment of the benchmark interest rates for deposits or loans.
"The government increased the reverse repo rates and the SLF rate to increase the yield on interbank products to suppress liquidity in the banking sector," Tan told the Global Times Tuesday.
On Tuesday, the PBC didn't conduct any open market reverse repos as liquidity was relatively high in the banking system, the PBC noted. It also refrained from offering reverse repos on Monday.
Tan said the government will be cautious about adjusting benchmark interest rates. "First, there is no lack of money in China's financial system, and an interest rate cut might add chaos to the already overflowing sector. Second, the US government's stance on another interest rate increase is unclear, which holds the Chinese government back from acting impulsively," she said.
Tan also doesn't see much chance of a rate increase in China because inflationary pressure remains low. "I think the government will adopt a wait-and-see attitude for the time being," she noted.
The last time the PBC adjusted the benchmark one-year interest rate was in August 2015, when it lowered the deposit and lending rates each by 0.25 of a percentage point.
