China’s money market rates have fallen sharply amid signs that the government is beginning to ease its tight monetary policy around the edges to keep growth on track.

Premier Wen Jiabao vowed last week to “fine tune” policies, which many analysts said heralded a shift towards a moderate loosening of the monetary straitjacket imposed on the economy over the past year to control inflation.

An indication that the government was delivering on its promise came on Wednesday with a nearly 70 basis point drop in the seven-day repo rate, the steepest decline in three weeks in the country’s most important gauge of interbank liquidity. Moving in tandem, the one-year interest rate swap plumbed a six-month low at 3.37 per cent.

Analysts have been looking for the policy easing to come via two channels: an injection of liquidity through open-market operations and informal guidance to banks to lend more.

There are indications that both forms of easing are now under way. Some Rmb107bn (US$16.8bn) in central bank bills are maturing this week and the People’s Bank of China has so far announced an issuance of only Rmb11bn, putting it on course for a sizeable net injection of liquidity in the financial system.

Meanwhile, the country’s biggest banks ramped up their lending at the end of October after the central government called on them to provide more credit support for small and medium-sized enterprises, according to a report in the official China Securities Journal on Wednesday.

“We believe loosening will proceed faster than expected,” Shen Jianguan, an economist with Mizuho Securities, wrote in a note.

Although the possibility of an interest-rate cut is seen as remote, he said that China could lower the portion of deposits that banks are required to lock up as reserves as early as December. Even as major developed economies have struggled, Chinese growth has remained remarkably robust, with the economy expanding at an annual rate of 9.1 per cent in the third quarter.

Analysts expect that it will slow more towards the end of the year, with exporters suffering and domestic companies from property developers to steel mills feeling the pinch from tight monetary conditions.

The Shanghai stock market, which is often driven more by policy signals than by economic fundamentals, has rallied 8.5 per cent over the past week, starting its climb when Premier Wen mentioned the need to “pre-emptively fine-tune policy at a suitable time and by an appropriate degree”.

Before implementing a more decisive loosening of monetary policy, the government will want to be sure that stubbornly high inflation has truly decelerated and that once-soaring house prices have fallen. In the meantime, official data for October, which are due to be published next week, are likely to point in the right direction for a continuation of the moderate loosening.

Wang Tao, an economist with UBS, forecast that consumer price inflation would decline to 5.3 per cent year-on-year from 6.1 per cent in September on the back of falling food prices.