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China money rates slip after holiday, benchmark IRS forecast rate cut

[SHANGHAI] Chinese money rates mostly slipped this week after a week-long holiday, while benchmark interest rate swaps (IRS) forecast another official interest rate cut to bolster the economy.

The People's Bank of China (PBOC) in its open market operations began soaking up excessive short-term liquidity after the break this week, typically flooding the money market for a couple of weeks after the Lunar New Year holiday.

The drain did not signal that the central bank would stop monetary easing this year, namely cutting banks' reserve requirement ratios (RRR) and reducing interest rates, as well as injecting medium- and long-term funds via policy tools, traders said.

"While the PBOC typically drains excessive funds right after the holiday, China's economic conditions mean that it will not change its easing bias adopted since late last year," said a trader at a Chinese commercial bank in Shanghai.

The weighted average of the seven-day repo rate , the barometer of short-term liquidity supply in the money market, stood at 4.75 per cent by midday, dropping 7 basis points from Feb 17, the last trading day last week ahead of the Lunar New Year break.

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The one-day rate fell 4 basis points from Feb 17 to 3.44 per cent.

The PBOC mopped up a net 142 billion yuan (US$22.6 billion) from the market this week after it had injected huge amounts of money into the market in the weeks running up to the holiday to help banks meet the seasonal demand.

Chinese banks traditionally face a huge demand for cash from households and firms to pay for holiday gift-giving, celebrations and bonuses ahead of the new year.

Much of the funds flow back into the banking system shortly after the break. Markets resumed trading on Wednesday.

The central bank cut the RRR in early February after reducing official interest rates for the first time for more than two years in November, on top of injections of base money via policy tools, such as lending facilities, as China's growth slowed to the slowest pace in 24 years last year.

"The market has reached a consensus that more easing steps are on the way, although it is divided over exact time," said a trader at a Chinese state-owned bank in Shanghai.

As such, the benchmark two-year IRS fell to its lowest level since August 2012, at 2.45 per cent on Thursday. Friday's data will be available only later in the day.

That contract is based on the official one-year deposit rate, currently fixed at 2.75 per cent.

The market is now pricing the contract less than where rates would be if the PBOC executed another 25-basis-point cut to the one-year deposit rate.


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