First downward adjustment in nearly 10 months! What is the impact of the central bank's move? Liquidity | Economy | Central Bank

On June 13th, the People's Bank of China announced that in order to maintain reasonable and sufficient liquidity in the banking system, it conducted a 7-day reverse repurchase operation of 2 billion yuan through interest rate bidding on the same day, with a winning interest rate of 1.90%, a decrease of 10 basis points from the previous day. This is also the first downward adjustment in nearly 10 months. Experts believe that this move slightly exceeds expectations, but it is also reasonable. The main reason is that the current economy is weak and total demand is insufficient. Lowering policy interest rates will help improve financing demand, guide market expectations, and support the development of the real economy.

"Since the beginning of this year, although China's macroeconomy has partially recovered, the recovery trend is not stable, and the confidence and expectations of business entities are still weak. Some small and medium-sized enterprises have not yet emerged from difficulties. From the perspective of price levels, the national consumer price index in May decreased by 0.2% month on month, and only increased by 0.2% year-on-year, continuing to be lower than market expectations. In this situation, the policy interest rate has decreased, which is necessary and urgent, and the time is ripe." said Dong Ximiao, Chief Researcher of Zhaolian Finance.

Wang Qing, Chief Macro Analyst of Dongfang Jincheng, stated that the 7-day reverse repurchase operation rate is a short-term policy rate, and there are two reasons behind this reduction: firstly, since the second quarter, the economic recovery has been stable, but weak, and the real estate market has once again shown a weakening trend, requiring timely implementation of stable growth policies. The current policy interest rate reduction, combined with the recent decrease in bank deposit interest rates, will effectively drive down the actual loan interest rates of enterprises and residents, thereby stimulating credit demand and accelerating consumption and investment. More importantly, the current policy interest rate cut has released a clear signal of stable growth, which will effectively boost consumer and investment confidence and promote the real estate industry to achieve a soft landing as soon as possible. The second reason is that the recent price level has been significantly low, which provides space for a moderate reduction in policy interest rates.

"Lowering the winning bid rate for reverse repurchase will release more policy signals to stabilize market expectations, strengthen countercyclical regulation, promote financial institutions to continue to benefit the real economy, and promote the stable and moderate reduction of comprehensive financing costs for enterprises and personal consumption credit costs, creating a suitable monetary and financial environment for economic recovery, peace, stability, and healthy development." said Pang Ming, Chief Economist and Research Director of JLL Greater China.

Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, also believes that the central bank's reduction in reverse repurchase rates will lower the short-term funding cost for commercial banks to integrate into the central bank, which will help reduce the overall debt cost of banks and positively transmit the loan cost to the physical sector.

Equally attracting market attention are the convenient operation of mid-term lending on the 15th, as well as whether the loan market quotation interest rate on the 20th has changed. Regarding this, Zhou Maohua believes that based on historical experience, the difference between the 7-day reverse repurchase rate and the 1-year MLF rate is 75 basis points. The reduction in the 7-day reverse repurchase rate this time means that the possibility of a long-term synchronous reduction in MLF rates in the future is increasing, and the possibility of a moderate reduction in LPR is also increasing.

"Considering the general pattern of policy interest rate system linkage adjustment, after the short-term policy interest rate is lowered, the mid-range policy interest rate will also follow suit. At the same time, considering that the MLF operating rate is the pricing basis for LPR quotations, if the MLF operating rate is lowered in June, the LPR quotation on the 20th will also follow suit," said Wang Qing.

Recently, Yi Gang, the President of the People's Bank of China, visited Shanghai to investigate financial support for the real economy and promote high-quality development. He stated that in the next step, the People's Bank of China will continue to implement a precise and robust monetary policy in accordance with the decisions and deployments of the Party Central Committee and the State Council, strengthen countercyclical adjustment, fully support the real economy, promote full employment, and maintain currency and financial stability. By comprehensively utilizing various monetary policy tools, maintaining reasonable and sufficient liquidity, maintaining a moderate and steady pace of monetary credit, promoting the stable and moderate reduction of comprehensive financing costs for the real economy, and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.

Experts believe that the current policy interest rate cut once again indicates that domestic monetary policy has strong independence in the context of fundamental differences in domestic and overseas price situations, as well as recent depreciation trends of the renminbi. From this perspective, regardless of whether the Federal Reserve continues to raise interest rates in June and the second half of the year, the impact on domestic monetary policy will be relatively limited. Fundamentally speaking, this policy interest rate cut will effectively boost market confidence, further enhance macroeconomic recovery in the second half of the year, and thus solidify the foundation for the stable operation of the RMB. Next, there is little possibility that the RMB will continue to depreciate due to the current policy interest rate reduction.

Source/Economic Daily