Quick Take: China Steps Out of Sync With Fed to Hold Interest Rates Steady

(Beijing) — China’s central bank left a suite of short-term interest rates unchanged after the U.S. Federal Reserve hiked interest rates overnight on Thursday as concerns over liquidity stress and capital outflows eased on the steadier yuan.

The People’s Bank of China (PBOC) surprised markets in March by raising three key repo rates, or interest rates it charges commercial banks in the money market, hours after the Fed raised interest rates.

This time however, the central bank refrained from following suit, leaving the benchmark seven-day repo rate at 2.45%, the 14-day repo rate at 2.6%, and the 28-day repo rate at 2.75%, unchanged from its last round of operations in March.

Liu Jian, senior analyst at the finance research center at the Bank of Communication Co. Ltd., said the PBOC is less likely to raise the benchmark lending rates in the short term, and would act cautiously on raising any money market rates due to current liquidity conditions.

Earlier on Thursday, the PBOC injected a net 90 billion yuan via reverse repos into the financial system, citing its intention to counter “liquidity stress.”

Market interest rates have been pushed higher since the start of 2017 as part of a national campaign to reduce risk and leverage in the financial system. Those rate moves have also tightened credit conditions and led to China’s bond curve inverting in recent months.

The recent firmer footing of the yuan also weakened the likelihood of further rate hikes in China’s money market, said Zhang Jiantai, foreign exchange strategist at Mizuho Bank Co.

The market was stable as Fed’s rate hike had been priced in, traders said. The Shanghai Composite Index edged up 0.06% at close on Thursday, while the yuan traded slightly stronger relative to the U.S. dollar for the day.

Contact reporter Leng Cheng (chengleng@caixin.com)