China's overnight money rate jumps to 4-month high, policy rate in focus

China's short-term money rates jumped to four-month highs on Thursday, driven up by rising seasonal cash demand, as the market's focus shifts to whether the central bank will trim policy rates to cushion the economic slowdown.

The volume-weighted average of overnight repurchase agreements, or repos, traded in the interbank market rose to 2.2291%, the highest since Sept. 14.

Traders attributed higher borrowing costs to tighter cash conditions against the backdrop of reduced cash supply from big banks in the market as most lenders had to shore up their cash positions ahead of quarterly tax payments in January.

"Cash conditions started to tighten in late trade on Wednesday, with many scrambling for funds," said a trader at a Chinese bank.

Traders expect the People's Bank of China (PBOC) to step up liquidity injection through open market operations in the run-up to the Lunar New Year holiday, from Jan. 31 to Feb. 6 this year, due to higher demand for cash from households and companies.

A state-run newspaper said earlier this month that the PBOC was set to "timely replenish" liquidity shortfalls before the long holiday.

Policy insiders and economists told Reuters that China's central bank was poised to unveil more easing steps to support slowing growth, though it would likely favour injecting more cash into the economy rather than cutting interest rates too aggressively.

But some market analysts and traders still expect a marginal interest rate reduction this month, following a cut to the lending benchmark loan prime rate (LPR) in December.

Li Chao, chief economist at Zheshang Securities said a 5- basis-point cut to the PBOC's seven-day reverse repo rate could happen as early as Friday, followed by reductions to interest rates on 14-day reverse repos, medium-term lending facility (MLF) and LPR by the same margin next week.

"The tiny rate cut is mainly due to the accelerated monetary tightening in other economies, such as by the Federal Reserve, and uncertainty in the domestic inflation trend," Li said in a note.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong)