Caixin
May 27, 2020 08:53 PM
FINANCE

Central Bank Defies Expectations of Policy Rate Cut

A pedestrian walks past the People’s Bank of China in Beijing on April 20.
A pedestrian walks past the People’s Bank of China in Beijing on April 20.

Rebuffing market expectations, China’s central bank has left an interest rate on reverse repurchase agreements unchanged when using the monetary policy tool after a nearly two-month hiatus.

The People’s Bank of China (PBOC) injected 130 billion yuan ($18.2 billion) into the money market via seven-day reverse repos on Tuesday (link in Chinese) and Wednesday (link in Chinese) with a 2.2% interest rate, the same rate as the previous repos on March 31 (link in Chinese). The agreements are a tool used by central banks to add to or reduce money supply via open market operations.

Money market interest rates rose swiftly after the PBOC announced the moves.

Analysts said that leaving the rate unchanged shows policymakers are weighing whether to moderate monetary policy as liquidity is relatively abundant and the economy is gradually recovering from the Covid-19 outbreak.

“Monetary policy may go back to normal in the future to maintain reasonable and abundant liquidity. It is estimated that the time of the loosest money supply (mid-April) has passed,” Zhang Jiqiang, an analyst of brokerage Huatai Securities Co. Ltd, wrote in a note (link in Chinese).

The central bank may also be concerned about loose monetary policy driving down the yuan’s exchange rate and increasing financial institutions’ leverage, analysts said.

In March and April, as policy rates were cut and massive amounts of liquidity were injected into markets, financial institutions found it easy to get their hands on cheap cash. But arbitrage emerged as some companies used money raised from bond issuance to buy banks’ investment products, according to Zhang.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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