As the Federal Reserve will soon disclose its latest rate decisions on June 14, the market generally expects itis very likely to raise interest rates this time.
Huang Zhilong, director and senior researcher of Suning Financial Research, told the Securities Daily that there are several reasons. Firstly, the unemployment rate in the US continued to hit record low, and non-farm payroll employment continued to stay high. Secondly, the inflation pressure in the US is emerging, and it needs an interest rate hike to cope with inflation expectation.
Under such background, Huang Zhilong believes that the People’s Bank of China (PBOC) will subsequently adjust the interest rates for open market operations (OMO). The Chinese financial market had expected that the PBOC would cut interest rates on June 6 to swap the already-extending mature medium-term lending facility (MLF), but it again extended the MLF. This indicates that the PBOC may loosen monetary policy to cope with impact brought by the Fed’s interest rate hike. Therefore, the case might be that following the Fed’s interest rate hike, the PBOC will adjust OMO interest rates to maintain the stability of the renminbi.
Wang Qing, deputy general manager of the research development department of (Golden Credit Rating International, told the Securities Daily that the PBOC might rise the reverse purchase or other OMOs rate by 5-10 percentage points. On the other hand, the 10-year Treasury bonds between China and the US decreased by around 70 percentage points, a slightly lower than comfort zone of around 90 percentage points. On the other hand, currently the money market interest rate is still higher than the OMO rates. A modest raise in OMO rates will narrow the spread between the two. This will enhance the OMO rate’s conduction to money market interest rates, and promote the monetary policy’s transforming to quantity-focused to price-focused one. Meanwhile, it will send a signal of neutral and prudent monetary policy to market player, and restrict unreasonable financing behavior.
Translated by Coral Zhong