PBOC tightening triggered by Fed action

People’s Bank Governor Zhou Xiaochuan made clear at the National People’s Congress that the trend would be towards further monetary tightening over coming months. So today’s decision by the PBOC to raise the interest rates it charges on reverse repos was no surprise. But PBOC rate moves don’t follow a regular schedule and the timing, just hours after the US Fed tightened, suggests policymakers may also have hoped the move could help stabilise the renminbi. In the event, the dollar has weakened against most major currencies today, but the PBOC’s caution is understandable. Capital outflows have tended to increase when the renminbi has weakened against the US currency. Indeed, while capital controls have played a big part, the recent stability of the exchange rate goes some way to explain why outflows in February appear to have stalled.