Surge in interbank rates is a hawkish signal – Capital Economics

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.

Key quotes

“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.”

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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