Julian Evans-Pritchard, Senior China Economist at Capital Economics suggests that the People Bank of China (PBOC) could be delivering a hawkish signal, in light of the recent surge in the interbank rates.
“Short-term funding costs for banks have risen sharply during the past couple of weeks. The 7-day depository repo rate (DR007), which has been flagged by the PBOC as a key benchmark and focus of monetary policy, jumped over 100 basis points to a two-year high. Swings in interbank rates are common in China, but the recent move stands out as unusually large.
The proximate cause is a seasonal tightening of liquidity ahead of Chinese New Year, when demand for cash surges. But this is an incomplete explanation.
After all, the PBOC has the tools to keep interbank rates steady when it wants to. It could have prevented the latest jump by injecting funds via its lending facilities and daily market operations. Instead, it has been withdrawing liquidity in recent days.
At the very least, this implies that the PBOC is content to let monetary conditions tighten temporarily. But it also hints at a more hawkish stance and reinforces our expectation that policy rates will rise this year, perhaps as soon as this quarter.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.