Economists expect China’s monetary policy to be less accommodative in the foreseeable future amid rising CPI and asset inflation and the incomplete task of deleveraging.
Standard Chartered economists think China’s monetary policy will not diverge significantly from the Fed policy this year. “With the market pricing in two Fed rate hikes this year, we think the PBoC may raise the policy rate level by another 20bps for the rest of the year, including rates on reverse repos, standing lending facilities (SLF), MLF and pledged supplementary loans (PSL)”, SCB economists said.
“We do not expect cuts in benchmark deposit and lending rates or the reserve requirement ratio. Instead, the PBoC is likely to keep money-market liquidity tightly balanced and gradually raise interest rates on its lending to commercial banks. The PBoC may raise policy rates further in the year.”
DBS also sees “A series of signs have flagged an inflection point” in the People’s Bank of China’s (PBoC) monetary policy of tightening. On February 3, the authority raised rates on seven-, 14- and 28-day reverse repos by 10 basis points each to 2.35%, 2.5%, and 2.65%, respectively. The bank noted it is the first increase since 2013 for the two shorter tenors, and the first since 2015 for the 28-day contracts.
The moves come one week after PBoC increased the one-year rates on Medium-term Lending Facility to 3.1% from 3%. The PBoC conducted 6M and 1Y medium-term lending facility (MLF) operations on January 24 of the amounts of CNY 138.5bn and CNY 107bn , respectively.
SCB economists think the move confirms that monetary and credit policy will likely be moderately tighter this year as the move is to help roll over maturing MLFs and maintain stable liquidity in the banking system, as the Central Economic Work conference convened last month set a “prudent and neutral” monetary policy stance for 2017.