PBoC Surprising Rate Hike

The People’s Bank of China (PBoC) surprised the market by tightening monetary policy on Friday for the first time in almost 6 years.

On the first day back from the Lunar New Year Holiday, the PBoC increased the cost of borrowing across their short-term curve from 1-month to 2-years. This move also raised the overnight deposit rate from 2.75% to 3.10%.

A rate hike on the first working day after a holiday signals the start of a different policy direction away from Central bank stimulus and towards more fiscal and domestic demand policy measures.

With Chinese factory orders rebounding after several years of deflation, Friday’s move reflects ¬†the PBoC’s determination to rein in leverage which has seen rapid expansion in the bond and property markets.

As a result of the higher rates, the Chinese Yuan traded to a 4-month high of of 6.79  against the US Dollar into the weekend.