The People’s Bank of China said late last week that it will now mainly use seven-day reverse-repo operations and the one-year mid-term lending facility for short- and medium-term liquidity demand. It also indicated a range it deems as stable for the seven-day interbank interest rates, between 2.6% and 2.9%, a band much narrower than the broader rates corridor implies. Zeroing in on two rates helps clarify policy intentions on the road to a more market-based toolkit and could prove vital in constructing a yield curve for securities and loans that’s understood and trusted by investors. According to Bloomberg, if all goes to plan, that should give the economy a more transparent yardstick against which to price risk as the traditional one-year lending and deposit benchmarks are consigned to history.
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