RMB band widening – a step to regain effective monetary policy?

March 16, 2014

BEIJING - The People's Bank of China announced yestoday (Saturday) that it will widen the USD/CNY trading band to 2% from 1%, effective Monday 17, following a move almost two years ago that enlarged the USD/CNY trading band from 0.5% to 1%. PBoC also announce that the spread between the USD/CNY selling and buying prices offered by foreign exchange-designated banks to their customers is not to exceed 3% of central parity (till now 2%), giving further flexibility to the markets.

ANZ Bank says the move was widely expected, and that the timing is appropriate. “The RMB exchange rate will be much less predictable and more volatile in the foreseeable future, which will be helpful for the PBoC to deter speculative capital inflow and regain monetary policy independence,” ANZ said. “In addition, reduced speculative flows and increased flexibility in the RMB exchange rate will help set the stage for China to accelerate its interest rate liberalisation process”.

ANZ says that given the PBoC has been intervening heavily by buying USD and selling RMB in the FX market, this round of widening of the band could further weaken the currency. But, ANZ adds, RMB deprecation will be short-lived if there is no fundamental change to one-way capital inflows, especially when China still has a very sizable current account surplus. www.live.anz.com (ATI).