China’s central bank sends dovish sign on liquidity as US Fed firms on rate rise
People’s Bank of China resurrects 14-day reverse repos to inject billions into the banking system
China’s central bank has sent a dovish signal on liquidity to calm market concerns, dusting off a policy tool to inject cash into the system amid hints from the US of a rate hike.
People’s Bank of China deputy governor Yi Gang assured the market on Friday that Beijing would keep sufficient liquidity in the banking system with its newly restored 14-day reverse repurchase agreement, a tool to channel funds to banks.
I believe the case for an increase in the federal funds rate has strengthened in recent months
The assurance came hours before US Federal Reserve chief Janet Yellen said: “In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”
The Fed last raised rates in December and another is expected this year, which may draw capital back to the United States, draining liquidity in other markets, including China.
A surprise return of the 14-day reverse repo on Wednesday caused a stir in China’s interbank market. The PBOC last used the instrument in February amid serious capital outflow pressure.
Observers were divided over whether the 14-day term – longer than the usual seven-day term – signalled a tightening or loosening in monetary policy.