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China’s Central Bank Increases Policy Rates on Strong Economic Data

By Pan Che and Peng Qinqin

(Beijing) — The People’s Bank of China raised open market operations (OMO) and medium-term lending (MLF) rates by 10 basis points on Thursday, after the U.S. Federal Reserve raised its benchmark interest rate by a quarter of a percentage point to a range between 0.75% and 1%.

The monetary authority attributed the hike in policy rates to better-than-expected economic data in January and February pointing to a good start this year, with China’s economy showing signs of steadying.

After the hikes, the 7-day, 14-day and 28-day reverse repo rates were at 2.45%, 2.60% and 2.75%, respectively, and the 6-month and 1-year MLF rates were at 3.05% and 3.2%.

On Thursday afternoon, the central bank also raised the overnight interest rate of the short-term lending facility (SLF) by 20 basis points to 3.3%, the 7-day SLF rate by 10 basis points to 3.45% and the 1-month SLF rate by 10 basis points to 3.8%, according to financial data provider Wind Information.

It was the third time that the monetary authority has increased its short-term rates in as many months. The move came a day after the end of China’s annual parliamentary session where leaders vowed to implement a prudent and neutral monetary policy to curb asset bubbles and guard against financial risks.

PBOC officials told a press conference Thursday morning that the increase in the policy rates should not be misinterpreted as a hike in China’s benchmark interest rate, and insisted the move didn’t mean the government had veered from its outlined monetary policy.

“Looking ahead, the PBOC may continue to taper monetary easing, but it is unlikely to raise the benchmark deposit and lending rates this year.” Huili Chang, a researcher at China International Capital Corporation Ltd., wrote in a note Thursday.

The latest adjustment to China’s benchmark interest rates date back to October 2015, when the PBOC lowered the 1-year benchmark lending interest rate by a quarter of a percentage point to 4.35%, and cut the 1-year benchmark deposit interest rate by a quarter of a percentage point to 1.5% in a bid to bolster economic growth amid downward market pressure.

The U.S. Federal Reserve’s interest rate hike was less hawkish than expected, and the U.S. Dollar Index (DXY) shed more than 1% after the announcement.

Fearing that higher U.S. rates could trigger further capital outflows, China’s central bank set the yuan’s central parity rate at 6.8862 against the U.S. dollar Thursday, stronger by 253 points. The move pushed up the floating band to its highest level in nearly two months.

Contact reporters Pan Che (chepan@caixin.com)

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