PBOC seen holding rates post Fed hike amid stable yuan, bond gap

The People’s Bank of China (PBOC) will refrain from raising open-market interest rates even if the US Federal Reserve (the Fed) decides to increase borrowing costs next week, according to a Bloomberg survey.

More than 80 percent of 32 economists, analysts and traders said the PBOC will maintain its current rates on reverse-repurchase agreements, which guide the cost of funding in financial markets. Four forecast an increase of 10 basis points and one expects a hike of 15 basis points. The official benchmark rate for the broader economy has been on hold since late-2015.

Investors anticipate the Fed will boost its benchmark lending rate a quarter-point to a range of 1.25 percent to 1.5 percent when it meets from December 12. The PBOC refrained from raising borrowing costs in June after a Fed hike, a switch from March when it increased money-market costs hours after its US counterpart tightened.

Recovering sentiment on the yuan, the biggest yield gap in more than two years between US and Chinese 10-year sovereign bond yields, and still-moderate inflation offer ample breathing room for policy-makers as 2017 comes to a close. Holding for now helps avoid market volatility, too, as interbank rates have already risen strongly this year, amid a renewed pledge to curb risks and tighten regulation.

Still, abstaining from a rate increase fuels risks of yuan depreciation, especially in an environment where a prospective US tax cut may lead to some capital repatriation. Emerging-market portfolio flows turned sharply negative in late-November in anticipation of the tax deal that emerged earlier this month, according to analysis by the Institute of International Finance.

China’s open-market interest rates are becoming a de facto benchmark, so moving it is “sensitive,” said Shi Lei, chairman of Attractor Adviser Ltd., an advisory group in Shanghai. “China pays more attention to domestic economic fundamentals in terms of monetary policy. There’s no necessity for a hike as inflation won’t be very high next year, and the financial system is tightening,” he added.

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