China’s central bank pledges to maintain flow of cash in banking system to keep interest rates low

China’s central bank will keep sufficient liquidity in the banking system so interest rates can be kept low and banks have cheap money to lend, Yi Gang, a deputy governor at the People’s Bank of China said on Friday.

His comments came hours before a speech by Federal Reserve chairman Janet Yellen may give clues about the timing of the next interest rate hike from the US central bank.

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China has resumed the 14-day reserve bond repurchase agreement this week, a tool that allows the central bank to provide funds to banks in the interbank market.

The People’s Bank of China used the tool for three days in a row up to Friday, injecting 180 billion yuan (HK$210 billion) into the market.

The surprise return of the 14-day “ reverse repo”, in addition to the usual seven-day reverse repo, in China’s interbank market after a six-month gap, has caused confusion among market investors as it could potentially indicate the central bank wants money rates to be slightly higher.

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It has also fanned speculation that the odds on bolder policy moves, such as a cut in benchmark interest rates, have fallen.

Yi told reporters on the sidelines of a forum in Beijing that the central bank would continue to use the 14-day reverse repo to manage liquidity as “an additional option”.

The central bank will mainly use open market operations to achieve its policy goal of ensuring sufficient supplies of funds, Yi said.

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