jamuna banking desk: China’s central bank raised borrowing cost as a stable economy and factory reflation give it scope to follow the Federal Reserve in tightening 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.
The central bank said markets expected higher borrowing costs and that open-market rate increases don’t necessarily equate to interest-rate hikes, according to a statement.
With the economy steady, inflation rising and real lending costs going down, financial institutions have strong incentives to expand credit, and housing prices have surged in some cities, if said.
“The PBOC is right to explain that this adjustment was in large part driven by market expectations,” said Andrew Polk, Beijing-based head of China research at Medley Global Advisors, which advises institutional investors. “Moving in line with the Fed also shows that China is still essentially importing U.S. monetary policy, despite increased capital controls over the past several months.”
With the economy starting 2017 on a firmer footing, a relaxed PBOC Governor Zhou Ziaochuan last week said the interest-rates will respond to the domestic economy.
Factory-gate prices have ended four years of deflation and are now climbing at the fastest pace since 2008, allowing him to switch his sights to reining in excessive leverage and surging home prices.
The onshore Yuan strengthened the most in a month on an intra-day basis.
Government debt also increased, with 10-year yields falling four basis points to 3.32 percent.
Higher open-market operation interest rates are mainly decided by the market, the PBOC said in a Q&A statement. More flexible interest rates can help deleveraging, curb bubbles and prevent risks, market participants already had relatively strong expectations for higher open-market rates based on China’s economic rebound and the Fed’s rate hike, it said.
Li Keqiang announced this month a 2017 expansion target of around 6.5 percent, or higher if possible, a speed he said isn’t low or easy to meet. China will fasten its “seat belt” and rein in risks as it pursues mid-to high-speed growth, the premier told a group of about 1,000 journalists at the Great Hall of the People on Wednesday.
The PBOC said in its statement there’s no need to over-interpret its monetary actions. Some economists also cautioned against reading too much into the announcements.