BEIJING (Dec 14): China’s central bank unexpectedly raised borrowing costs following the Federal Reserve’s decision to tighten monetary policy.
Hours after the Fed’s quarter percentage-point move, the People’s Bank of China increased the rates it charges in open-market operations and on its medium-term lending facility, though making smaller adjustments than its US peer.
The cost of seven-day and 28-day reverse-repurchase agreements was raised by five basis points. That followed an increase in mid-March. The PBOC skipped the use of 14-day reverse repos Thursday. The cost of funds lent via MLF was also increased by five basis points, with the 1-year rate raised to 3.25%.
"This action seems to follow the Fed," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. "Since it only lifted the rate by just five basis points the central bank does not want to jeopardize the market with an aggressive hike. It does indicate the tightening bias of the policy makers and this stance will continue in 2018."
More than 80% of 32 economists, analysts and traders surveyed ahead of the Fed meeting had said that the PBOC would maintain its rates on reverse-repurchase agreements, which guide the cost of funding in financial markets. The PBOC refrained from raising borrowing costs in June after a Fed hike then.
Recovering sentiment on the yuan, a yield gap near the widest in more than two years between US and Chinese 10-year sovereign bonds, and still-moderate inflation offer breathing room for policy makers as 2017 comes to a close. But abstaining from a rate increase may have fueled risks of yuan depreciation, especially in an environment where a prospective US tax cut may lead to some capital repatriation.
The seven-day reverse repurchase rate is now viewed as a key policy benchmark, steering borrowing costs by creating the bottom part of a corridor. MLF rates are used to guide costs through the yield curve. The traditional one-year lending and deposit benchmark rates have been unchanged since late 2015.