China’s Central Bank raises borrowing costs after Fed hikes

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(March 22): China’s central bank increased the cost of short-term loans to commercial lenders, tightening policy in step with the US Federal Reserve.

The People’s Bank of China raised the interest rates it charges on 7-day reverse-repurchase agreements by five basis points, the central bank said in a statement. The move is "in line with market expectations and a normal reaction to the Fed’s rate hike", the PBOC said in a statement on the website.

Analysts expect the central bank to make modest increases in money-market rates in 2018 as it aims to keep up the pressure on deleveraging and prevent too much divergence with US policy, according to a Bloomberg survey. The PBOC hasn’t changed the benchmark one-year lending rate since October 2015.

It’s a "symbolic" move and it’ll have limited impact, Jiang Chao, a Shanghai-based bond analyst at Haitong Securities Co wrote in report following the announcement. "The monetary policy stance hasn’t changed," he said, "with the yuan staying stable, the central bank will pay more attention to domestic economic conditions."

While today’s rise narrows the gap with market rates, there’s room to further shrink that gap to help strengthen the transmission of policy rates, the central bank said in a statement posted on its website.

Thursday’s decision was the first following the appointment of Yi Gang as governor, and the former number two at the central bank has pledged to maintain the stance of "prudent and neutral" policy. The PBOC has avoided using benchmark interest rates in an effort to avoid weighing too much on the broader economy as it seeks to curb leverage in the financial sector, instead pushing up rates on short- and medium-term loans.

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"In 2017, concerns about yuan weakness and capital outflows meant following the Fed was less of a choice and more of a necessity," Bloomberg economists Tom Orlik and Fielding Chen wrote in a note. "This time around, the yuan is steady and cross-border capital flows balanced."

Higher funding costs are helping China stay in step with the Fed’s tightening, as the spread between China’s 10-year government bonds and the Treasuries narrowed to the smallest in about a year.

The PBOC increased the cost of seven-day reverse-repos to 2.55 percent, and skipped the use of 14-, 28- and 63-day agreements.

Earlier Thursday, the Hong Kong Monetary Authority, which oversees the territory’s currency peg with the dollar, raised its base rate by a quarter point to 2 percent.