SHANGHAI: Chinese money market rates fell sharply for the fourth week on Friday as the central bank's efforts to ease a protracted short term liquidity crunch showed signs of gaining traction.
At midday on Friday, the volume weighted average yield on the benchmark seven-day bond repurchase agreement (repo) was trading at 2.88 percent. The last time the seven-day repo closed below 3 percent was in October 2014.
For the week, the seven-day repo was down 52 basis points (bps), following a 53 point drop the week before.
The 14-day repo was also down substantially on the week, falling 49 bps to 3.44 percent.
On Tuesday, the Chinese central bank adjusted its guidance for the seven-day repo down 10 bps to 3.45 percent, the fourth such cut since the Chinese New Year in February.
These signals from the central bank, combined with lower pressure on yuan liquidity from a rising dollar, appear to have helped ease a long drought in the money markets which persisted for weeks after the Lunar New Year.
Rates usually fall after the new year as cash demand for gifts and other expenses ebbs.
Nonetheless, longer-term rates have continued to creep upward since late February, suggest that the central bank and other policymakers have more work to do if they want to guide real borrowing costs for investment down.
Analysts said that easing money market liquidity conditions might not persist without more aggressive intervention by the People's Bank of China.
"The weak inflation profile suggests that further monetary policy easing is still needed in spite of recent retreats of onshore money market rates," wrote Li-Gang Liu and Zhou Hao of ANZ Bank in a research note Friday.
"We believe that only permanent liquidity injection will be able to sustain the current favourable monetary conditions to head off the risk of deflation."
The People's Bank of China (PBOC) cut interest rates on Feb. 28 in its latest effort to support the economy as momentum slows, after its first rate cut in more than two years in November and a reduction in banks' reserve requirement ratios (RRR) in early February.
China's inflation data for March produced small positive surprises on Friday, but remained tepid, with little sign that Beijing's easing measures to date have significantly reduced worrisome deflationary pressures.
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