China's money market rates unexpectedly spiked on Tuesday morning, with the benchmark seven-day repo rate jumping 107 basis points, as banks meet extra required reserves based on new deposit levels reached at the end of June, traders said.
Chinese banks are required to pay the balance of reserves based on their latest deposits every fifth, 15th and 25th of the month, and such payments had not cause any difficulties in the past.
Banks also typically collect more deposits at the end of June and December to window-dress their financial statements. That means they need to particularly pay extra reserves on the fifth of July and January, although such payments had not pushed up money market rates too much in the past.
"Market liquidity conditions have changed a lot because nine official bank required reserve ratio hikes since last October have pushed the ratios to record highs," said a dealer at a major state-owned bank in Shanghai.
Like us on Facebook
"Banks' ability to cope with short-term money demand has been greatly weakened. With more and more banks having to resort to the money market for short-term demand, we expect more volatility in the market that has not been seen before."
The benchmark money market rate, the seven-day government bond repurchase rate spiked 207 bps to 6.8770 percent from Monday's close of 4.8039 percent.
The shortest overnight repo rate jumped to 5.8969 percent from 2.8610 percent. The 14-day repo rate surged to 7.4953 percent from 4.3335 percent.
China's interest rate swaps were stable on Tuesday morning as the PBOC held back from raising interest rates even though rumours of an impending hike have linger since May due to persistently high inflation.
The central bank pledged on Monday to keep its "prudent" policy -- a euphemism for a tight monetary stance -- to wrestle inflation under control, but signalled some concerns over slowing growth by stressing policy "stability".
Some analysts now expect the PBOC to reduce the intensity and frequency of policy tightening to avoid hurting the economy, although others consider that still high inflation pressures will make it difficult for the central bank to relax.
The benchmark five-year IRS edged down 1 basis point to 4.04 percent at midday on Tuesday while the one-year IRS inched up 1 bp to 3.77 percent.