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The People’s Bank of China (PBoC) is expected to raise its interest rate further by around 20 basis points by the end of this year leading the 7-day reverse repo rate to 2.65 percent, assuming that the United States Federal Reserve will hike by another 50 basis points for the rest of the year.
The rate hike action undertaken by the Federal Open Market Committee (FOMC) in the monetary policy meeting held overnight, triggered PBoC’s move which can also be interpreted as a precautionary move for exchange rate stabilization, ANZ Research reported.
But the main reason is that the PBoC is engineering a monetary policy transmission mechanism in the money market and the central bank needs to catch up with the market anyway. Besides money market rates, the risk of China lifting its benchmark deposit rates has increased.
"The policy backdrop should result in bond yields rising and steepening yield curve," the report said.
