China raises short-term interest rates in fresh tightening signal

[SINGAPORE] China's central bank surprised financial markets on Friday by raising short-term interest rates on the first day back from a long holiday, in a further sign that it is slowly moving to a tighter policy bias as the economy shows signs of steadying.

The People's Bank of China (PBOC) said it raised the interest rate on open market operation reverse repurchase agreements (repos) by 10 basis points, effective on Feb 3.

Two banking sources also told Reuters it had raised the lending rates on its standing lending facility (SLF) short-term loans.

While the moves were modest, they reinforced views that Chinese authorities are intent on containing risks to the financial system this year by forcing highly debt-laden companies to deleverage and cracking down on the use of short-term money for speculative activities.

"It appears to be an intent to control a real estate bubble. It could also be aimed at arresting the yuan's depreciation, although it is on the reverse repo they touched upon and the impact remains to be seen," said Naoto Saito, chief economic researcher at the Daiwa Institute of Research In Tokyo.

"All in all, it comes across as a move to tweak interest rate levels to accompany a broader monetary policy shift."

In late January, the PBOC raised rates on its medium-term loan facility (MLF) for the first time since it debuted the liquidity tool in 2014. It was the first time it has raised one of its policy interest rates since July 2011.

Analysts expect any further steps to be gradual as policymakers weigh their impact on economic growth, and believe the PBOC will be in no hurry to raise the policy lending rate for now.

The seven-day open market operations rate was raised to 2.35 per cent from 2.25 per cent, the rate for 14-day tenor to 2.50 per cent from 2.40 per cent, and the rate for 28-day tenor to 2.65 per cent compared with the previous 2.55 per cent, the PBOC said in a statement.

Banking sources said the overnight rate for the SLF loan was raised to 3.1 per cent from 2.75 per cent, the rate for seven-day tenor to 3.35 per cent from 3.25 per cent, and the rate for one-month to 3.7 per cent from 3.6 per cent, both sources told Reuters.

China's economy has seen a broad-based pickup in recent months, with fourth-quarter GDP beating expectations due largely to a strong housing market and higher government spending on infrastructure projects.

REUTERS