The People’s Bank of China raised short-term market interest rates today. It repriced the short-term funding costs by hiking the 7-day reverse repo rate by 10 basis points from 2.25 percent to 2.35 percent. This move by the Chinese central bank challenges the initial projection that the central bank policymakers are inclined to keep a prudent monetary policy in 2017, noted ANZ in a research report. The 14-day reverse repo rate was hiked to 2.5 percent from 2.4 percent, while the 28-day reverse repo rate was raised from 2.55 percent to 2.65 percent.

The PBoC’s move today is important as it implies that the central bank would undertake a flexible interest rate regime in 2017. The central bank has been maintaining the reverse repo rate at 2.25 percent since October 2015. Hence today’s change is ground-breaking. This implies that the People’s Bank of China would alter the onshore rates more frequently, stated ANZ.

“We stick to our call for a prudent monetary policy stance but the policy actions associated with this stance need to be reinterpreted”, added ANZ.

Overall, the bottom line is to avert a cash crunch in the midst of deleveraging and deflating financial bubbles in some sectors. The Chinese central bank, going forward, would continue to concentrate on establishing a yield curve with interest rate risks skewed towards the upside, said ANZ.