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%.
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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.
