Chinese Yuan: Policy-rate tweak leaves appreciation view intact – Commerzbank

Commerzbank’s Volkmar Baur explains that the PBoC will shift its operational policy rate from the 7‑day to the overnight reverse repo, aligning with actual money‑market usage and previously signaled testing at 1.25%. Bond yields and markets had already priced this lower rate, and Commerzbank still expects a gradual appreciation of the CNY, driven more by PBoC guidance than rate differentials.

Operational change, unchanged FX outlook

"The People’s Bank of China (PBoC) announced yesterday that it intends to make a slight adjustment to the operational implementation of its monetary policy. At present, the central bank uses the 7-day reverse repo rate as its policy rate to steer the 7-day repo rate between deposit-taking institutions in the money market. The PBoC has now announced that it will switch to the overnight reverse repo rate as its policy rate, with the overnight interbank repo rate becoming its new money-market target."

"This may sound rather technical, but for the exchange rate the key point is simple: in essence, nothing really changes. Admittedly, the PBoC’s 7-day reverse repo rate currently stands at 1.4%, while the overnight rate is set to be 1.25%, which at first glance looks like a rate cut. However, markets had already anticipated this development."

"Trading volumes tell a similar story. Deposit-taking institutions have in any case been using the overnight repo market much more heavily than the 7-day market for years. Over the past five years, average daily volumes in the overnight repo market have been around 30 times higher than in the 7-day repo market."

"Bond markets had also anticipated a lower policy rate for some time. Yields on 2-year Chinese government bonds have been hovering around 1.25% since the end of April, while even 3-year government bond yields have been only slightly higher since June."

"Aside from the fact that the CNY exchange rate tends to respond more strongly to the PBoC’s guidance than to interest-rate differentials anyway, the change in the policy framework should therefore do little to alter our expectation of a continued gradual appreciation of the CNY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)