7D Interbank ‘Effective’ Rate Reaches 14-Month Low This Week

• Interestingly, China did not cut its SLF rates this week following the 25bps cut in the RRR announced by the PBoC over the weekend.
  • The 7D SLF rate is currently standing at 3.1%; the last time PBoC cut its 7D SLF was in January (by 10bps).
• China also left its LPR rates steady this week (1Y at 3.7% and 5Y at 4.6%) despite market expecting a 5bps cut.
• However, the 7D interbank repo rate has been falling this month, reaching a 14-month low at 1.51% this week.
• In addition to be the most liquid among all types of IRS contracts, empirical studies have shown that the 7D repo rate is considered to be very informative in respect to monetary policy stance of the PBoC.
  • The 7D repo rate tends to track most turning points of monetary policy ‘fairly well'.
• Even though the 7D IB repo rate has been volatile in the past cycle, it could seen as an ‘effective’ rate and therefore further decrease in the 7D IB repo rate could indicate new cuts in China’s benchmark policy rates.
• As a reminder, China’s monetary policy framework is focused on controlling the 7-day reverse repo within an IR corridor (see chart).
• The IOER is currently at 0.35% and forms the lower bound of the PBoC IR corridor, while the 7D SLF rate (3.1%) forms the upper bound.

Source: Bloomberg/MNI