(Yicai) May 30 -- China’s central bank has conducted a CNY250 billion (USD34.5 billion) of seven-day reverse repurchase operations, the most this month

The People’s Bank of China injected CNY248 billion of liquidity into the banking system yesterday as CNY2 billion (USD275.9 million) of reverse repos matured, it said the same day. The interest rate was kept at 1.8 percent.

Reverse repurchase agreements, or reverse repos, form part of the PBOC’s toolkit to drain or add liquidity to the money markets. Using reverse repos, the central bank agrees to buy securities from banks with an agreement to sell them back at a later date.

Over recent days, market interest rates have seen a modest uptick, reflecting a slight tightening of liquidity toward the end of the month, according to Zhou Maohua, a researcher at China Everbright Bank.

The PBOC has moderately increased its open market operations to meet institutional funding needs and stabilize market expectations, Zhou added.

Several experts said that next month, the central bank may further step up its open market operations to ensure stability as the quarter changes.

RRR Cut

Market chatter about a possible cut in the reserve requirement ratio in June has increased because new government bonds could disrupt the capital market, businesses will buy foreign currencies to pay dividends, and financial institutions will have their mid-year assessments.

The RRR is the share of deposits that lenders are required to hold in reserve, either in cash or in accounts with the central bank.

Experts said that if the scale of government bond sales continues to increase, the central bank could make active moves to hedge against volatility, and a reduction in what is considered healthy reserves is more likely than a decrease in interest rates. 

Liang Weichao, a fixed-income analyst at China Post Securities, told Yicai that an RRR cut in the second quarter would better align with fiscal policy.

It is almost certain that a reduction in the loan prime rate will be guided by a downward revision of medium-term lending facility rates, according to a report by a research institute of Huaxi Securities. It is also possible that deposit rates will be lowered further.

China still has room for more comprehensive monetary policy tools, said Ming Ming, chief economist at Citic Securities. Next month, the European Central Bank is very likely to lower its rates and from past examples, it is not uncommon for the ECB to start a cycle of monetary easing before China which in turn tends to cut its rates before the United States. The environment for China's monetary policy will probably improve in the future, Ming added.

Editor: Emmi Laine