PBOC Raises Interest Rate On Open Market Operations

Moments after the Fed did as expected when it raised rates by 25bps, we - along with most other central bank watchers - made a prediction: now it was China's turn.

And since in recent years, the PBOC has not hiked the main benchmark rate but engaged in "targeted" tightening using the various reverse-repo facilities, we had to wait until today's open market operation was unveiled.

This was somewhat problematic as the PBOC only did a partial reverse repo, skipping the 14, 28 and 63-day operations, and only injecting liquidity - some 10BN yuan worth - via 7-Day reverse repos (in the process draining 150Bn yuan). Which meant that the only instrument that could see its rate changed today, was the 7-Day RR.

And just like on December 13, hours after the last Fed rate hike, when it hiked the 7-Day reverse repo rate by 5bps from 2.45% to 2.50%, so moments ago the PBOC once again raised the 7-Day repo rate from 2.50% to 2.55%, continuing the tradition of raising reverse repo rates in response to Fed rate hikes.

We expect proportional increases on the other reverse repo - 14, 28 and 63-day - tenors.

Commenting on the move, the PBOC said the rate hike was in line with market expectations, adding that the open market rate hike will "help limit irrational financing and stabilize overall leverage ratio."

Curiously, even this modest increase came as a surprise to some watchers, who noted that the PBOC no longer needs to follow the Fed moves tick for tick as the recent strength of the yuan means there’s less need to protect the currency. That was the view of Haitong Securities, which ahead of today's rate hike noted that even if the PBOC raises open market operation rates (which it did), "the scale will be limited and impact on market rates minor because they’ve been a lot higher than official rates."

Meanwhile, as discussed recently, total social financing growth  continues to decelerate...

... and inflation remains under pressure. And speaking of China's currency, following today's dollar plunge, the PBOC predictably fixed the Yuan at 6.3167, some 0.4% stronger vs Wednesday's 6.3396, the biggest move since February 27.

Followign the rate hike, just like in the US, Chinese shares fell, with the Shanghai Composite falling -0.2%, wiping out an earlier 0.2% gain. If the SHCOMP closes red we wonder if Marko Kolanovic will blame the drop in Chinese stocks on a rogue snowstorm over the Gobi desert.