China, Hong Kong Raise Rates after Fed’s Hike Decision

The Hong Kong Monetary Authority (HKMA) announced today the base rate was adjusted upward by 25 basis points to 2% while the People’s Bank of China (PBOC) increased the interest rate on 7-day reverse repurchase agreements by five basis points, after the Federal Reserve raise US interest rate by 25 bps on Wednesday.

The reverse repurchase agreement—also known as reverse repos—is deployed by China to control liquidity in its banking system. When the U.S.-China rate differential gets too wide, it would increase the risk of capital outflows from China

The 7-day reverse repo rate is now 2.55% and PBOC has injected RMB 10 billion (US$1.58 billion) into the financial system, according to the central bank in a statement.

China’s rate hike was the central bank’s first major policy decision under new Governor Yi Gang, who was appointed by the parliament on Monday.

According to a Bloomberg survey in January, economists predicted that the PBOC would raise its reverse repos by five basis points three times this year.

More hikes to come in 2019 and 2020

While the Fed signaled two more hikes in 2018, it also announced it would raise rates and steepened its outlook for hikes in 2019 and 2020, citing a stronger economic outlook.

Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income said that the Fed’s communication yesterday gave confirmation that it would take much to move it from a three rate hike path for 2018.

Additionally, the Fed is clearly signaling to market participants that pricing in 1.5 hikes in 2019 and 0.25 hikes in 2020, prior to yesterday afternoon’s announcement, was not in fact in sync with where the Fed mindset on policy currently resides, he added.

“Therefore, we think we’re likely to see something closer to three hikes in 2019 as well, and maybe a couple incremental hikes in 2020, depending on economic and financial conditions at that time, he predicted.” “Thus, markets should view yesterday’s communication as a guide to current thinking and should believe that the Fed’s commitment to longer-term normalization efforts will be greatly influenced by the data over the coming months.”