2nd LD-Writethru-Economic Watch: Chinese open market operation rates up after Fed rate hike

BEIJING, Dec. 14 (Xinhua) -- The interest rates for China's open market operations rose by 5 basis points Thursday, following the interest rate hike by the U.S. Federal Reserve on Wednesday.

The operations included 30 billion yuan (4.54 billion U.S. dollars) of seven-day reverse repos, with the interest rate up from 2.45 percent to 2.5 percent, and 20 billion yuan of 28-day reverse repos, with the rate up from 2.75 percent to 2.8 percent, the People's Bank of China (PBOC) said on its website.

The PBOC also injected liquidity of 288 billion yuan via one-year medium-term lending facility (MLF), with the interest rate up from 3.2 percent to 3.25 percent.

The central bank said it aimed to offset the impact on market liquidity from tax payments and maturing MLF later this month, and meet the seasonal liquidity needs of banks near the year end.

To meet the strong liquidity demand, the PBOC has provided total funds of 870 billion yuan through 28-day and two-month reverse repos since the end of October.

The central bank has also made arrangements for significant cash demands before the Spring Festival, an important Chinese traditional festival which will fall on Feb. 16, 2018.

"The liquidity supply in the banking system near the New Year and Spring Festival is guaranteed," the official said.

Since the beginning of this year, rates for reverse repos and MLF have increased three times by a total of 25 basis points.

"The increases reflected market supply and demand changes, and represented the market's normal response to the U.S. Fed's rate hike," according to a PBOC statement, citing an official in charge of open market operations.

The interest rates for open market operations are market-oriented and formed through bidding. Near the end of the year, strong liquidity demand in the banking system led to active bidding and thus higher interest rates, the official said.

A 5-basis-point rise is lower than expected, but "is conducive to forming reasonable interest rate expectations, avoiding excessive increases in leverage ratio and credit expansion of commercial banks," according to the official.

The official added the rises will narrow the gap between open market operations and money market rates, helping fix market distortion and making monetary policies more effective.

The Fed on Wednesday raised the benchmark interest rate by 25 basis points, the third increase in 2017.

"In view of realized and expected labor market conditions and inflation, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 1.25 to 1.5 percent," the Fed said in a statement.

The PBOC has increasingly relied on open market operations for liquidity management, rather than cuts in interest rates or reserve requirement ratios.

China has vowed to pursue a "prudent and neutral" monetary policy in 2017, apply a full range of policy instruments to maintain basic stability in liquidity, and hold interest rates at an appropriate level.

A Bank of Communications research note said it would be not very likely for China to raise benchmark interest rates after the United States in 2018, as the inflation and general economic situations did not support such moves.

China's monetary policy will remain prudent and be grounded in China's economic fundamentals in 2018.

"Preventing risks and lowering leverage may be among the top priorities for China's monetary policy," the note said.

The central parity rate of the Chinese yuan strengthened 218 basis points to 6.6033 against the U.S. dollar Thursday, according to the China Foreign Exchange Trade System.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. Enditem