Analysts at ANZ explained that the PBOC repriced the cost of short-term funding by raising the 7-day reverse repo rate by 10bps to 2.35%.
“This action is significant as it suggests the PBoC will adopt a flexible interest rate regime in 2017.
Since the PBoC has held the reverse repo rate at 2.25% since October 2015, this change is ground-breaking and suggests that the central bank will change the onshore rates more frequently.
We stick to our call for a prudent monetary policy stance but the policy actions associated with this stance need to be reinterpreted.
The bottom line is to prevent a cash crunch amidst deleveraging and deflating financial bubbles in certain sectors.
Going forward, the PBoC will continue to focus on establishing a yield curve with interest rate risks tilted towards the upside.”
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