MNI: PBOC Hikes OMO, MLF Rates; Injects CNY288 Bln via MLF

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     BEIJING (MNI) - The People's Bank of China raised the interest rates on its

open market operation instruments and its Medium-Term Lending Facility (MLF)

loans by five basis points each, one day after the U.S. Federal Reserve raised

its main interest rate by 25 basis points. 

     The PBOC raised the interest rate on its seven-day reverse repos to 2.50%

from 2.45%, the rate on its 28-day reverse repos to 2.80% from 2.75%, and the

rate on its one-year MLF loans to 3.25% from 3.20%, the central bank announced

on its website. 

     This was the first PBOC rate hike since March 16, when the PBOC raise its

open market operation and MLF loan rates by 10 basis points each. 

     Today, the PBOC injected a net CNY50 billion in its open market operation

and CNY288 billion via its one-year Medium-term Lending Facility (MLF) loans on

Thursday to hedge the impact of December tax payments and MLFs that mature

Saturday as well as to satisfy financial institutions' seasonal liquidity needs

in order to maintain stable overall liquidity conditions in the banking system,

the PBOC said in its announcement.

     The OMO and MLF operations resulted in a net injection of CNY148 billion

into the banking system today, as a total of CNY190 billion in reverse repos

mature Thursday. Taking account the CNY187 billion in MLF loans that mature

Saturday, the operations drained a net CNY39 billion.

     "As year-end approaches, banking system liquidity demand is very strong,

causing bidding to go up," the PBOC said. "So the rises in OMO and MLF rates

reflect the relationship between liquidity supply and demand and are also a

normal reaction to the Federal Reserve rate hike," the central bank said. 

     "The size of the increase in OMO and MLF rates is smaller than market

expectations, but it will still help the market to form a reasonable expectation

of interest rates and prevent financial institutions from overleveraging and

expanding credit issuances, as well as help control the macro leverage ratio,"

the PBOC continued. "At present,  market repo rates are much higher than OMO

rates, and this rate hike will narrow the gap between the two, fix market

distortions and smooth the monetary policy transmission mechanism."

     The PBOC also said the PBOC will conduct flexible open market operations to

satisfy reasonable seasonal liquidity needs, and liquidity will remain stable

during year-end and the Chinese New Year holiday, which falls in mid-February

next year. 

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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