The central bank has once again taken consecutive major actions! What is the meaning behind it?, On the day when the reserve requirement reduction takes effect

Introduction: In conjunction with monetary tools such as reserve requirement reduction, the resumption of 14 day reverse repo is mainly to cope with short-term factors at the end of the quarter that may disturb the funding situation, which is conducive to continuing to promote the stable and moderate reduction of credit and financing costs for market entities.

On the day of the implementation of the reserve requirement reduction, the 14 day reverse repurchase was restarted and interest rates were lowered.

On September 15th, the People's Bank of China launched a 139 billion yuan open market reverse repurchase operation and a 591 billion yuan medium-term lending convenience operation. On that day, there were 363 billion yuan of reverse repurchase and 400 billion yuan of MLF due, with a net withdrawal of 33 billion yuan.

It is worth noting that in the 139 billion yuan open market reverse repurchase operation, the central bank also conducted a 34 billion yuan 14 day reverse repurchase operation, with a bid interest rate of 1.95%, compared to 2.15% before, and a 20 basis point decrease in the bid interest rate.

Based on comprehensive market analysis, in conjunction with monetary tools such as reserve requirement reductions, the resumption of 14 day reverse repo is mainly to cope with short-term factors at the end of the quarter that may disrupt the funding situation, which is conducive to continuing to promote stable and moderate reductions in credit and financing costs for market entities. The follow-up policy space is still sufficient, and whether interest rates will be reduced will depend on comprehensive factors such as macroeconomic and real estate market trends before the end of the year.

14 day reverse repurchase interest rate reduction

On September 15th, the central bank conducted a 14 day reverse repurchase operation of 34 billion yuan, with a bid interest rate of 1.95%, compared to 2.15% previously. The bid interest rate decreased by 20BP.

The winning bid interest rate for the 14 day reverse repurchase operation last decreased in September 2022 and has remained at the 2.15% interest rate level since then.

Dong Ximiao, Chief Researcher of Zhaolian Finance, told First Financial that since the beginning of this year, when the policy interest rate has decreased in two rounds, the winning bid rate for the 14 day reverse repurchase has not changed. This decrease should be regarded as a supplementary decrease to other policy interest rates in the previous two rounds.

Pang Ming, Chief Economist and Director of Research at Jones Lang LaSalle in Greater China, told First Financial that the 14 day interest rate will fall in a staggered manner. Under the premise of matching terms, in combination with broad monetary tools such as reserve requirement cuts, it not only ensures reasonable and sufficient market liquidity and appropriate liquidity, but also helps to continue the trend of financial support for the real economy with sufficient strength, stable pace, optimal structure, and sustainable prices. It can also continue to promote the stable reduction of credit and financing costs for market entities.

Zhou Maohua, a macro researcher in the financial market department of Everbright Bank, said that from past experience, the resumption of 14 day reverse repo was mainly to cope with the short-term factors at the end of the quarter, which disturbed the capital surface, and meet the short-term capital needs of institutions.

On June 13th, the central bank launched a 7-day reverse repurchase operation, resulting in a 10 basis point decrease in the winning bid interest rate; On the same day, the central bank also announced the overnight, 7-day, and 1-month standing lending facility rates, all of which decreased by 10 basis points. On August 15th, the 7-day reverse repurchase operation and the 1-year medium-term lending facility bid rate decreased by 10 basis points and 15 basis points respectively, as well as the overnight, 7-day, and 1-month standing lending facility rates, both of which were 10 basis points lower than before.

MLF Volume Continuation

On the day of the implementation of the reserve requirement reduction on the 15th, the central bank launched an MLF operation of 591 billion yuan, with an increase in volume. The maturity of MLF this month was 400 billion yuan; The operating interest rate is 2.50%, which is the same as the previous period.

It is worth noting that the MLF has increased its volume by 191 billion yuan, a significant increase compared to the previous four months with a land volume of 10 billion yuan or less.

Wang Qing, Chief Macro Analyst at Orient Financial Holding, believes that the direct reason behind this is that market interest rates have risen significantly since September due to factors such as significantly increased credit investment and the peak of special bond issuance this year. Among them, the yield to maturity of one-year commercial bank interbank certificates of deposit has risen to near the MLF operating rate, and DR007 has continued to operate above the short-term policy rate. This means that the liquidity of the banking system is tightening, and the demand for MLF operations is correspondingly increasing. It can be seen that in the previous four months, due to the continuous lower market interest rates than the corresponding policy interest rates, the medium to long-term liquidity in the banking system was relatively abundant, resulting in lower demand for MLF operations by commercial banks.

On the evening of September 14th, the central bank announced a 0.25 percentage point reduction in reserve requirements on the 15th, which is expected to inject over 500 billion yuan of liquidity into the banking system. Market analysis generally believes that in this context, MLF continues to increase production on a large scale today, indicating clear policy support for the continued acceleration of the credit easing process, which is expected to drive a significant rebound in new credit and social financing in September.

Wang Qing believes that the addition and continuation of MLF, combined with the implementation of reserve requirement reduction, will release policy signals supporting banks to continue increasing credit investment and consolidating economic recovery.

According to Zhou Maohua's analysis, from the perspective of MLF tool positioning, this incremental sequel will moderately increase the investment of medium and long-term funds, continue to guide financial institutions to increase support for weak links in the real economy such as small and micro enterprises, key emerging areas such as manufacturing, and release positive signals of stable growth.

Zhou Maohua expects that the LPR interest rate will remain unchanged this month, mainly due to the central bank's two unexpected interest rate cuts since June. Currently, it is in the process of promoting the specific implementation of financial institutions, especially in terms of mortgage interest rates, to promote local policies tailored to the city, make full use of policy space, and accelerate the implementation and effectiveness of policies; Some banks still face significant pressure to lower interest rate spreads; At the same time, it is necessary to guard against the potential risks of excessively loose monetary policy and balance both internal and external factors.

"Today, the central bank simultaneously carried out 7-day reverse repurchase and 1-year MLF operations, with the winning bid interest rate remaining the same as last time. Therefore, it is expected that the LPR will remain unchanged this month," said Dong Ximiao.

Will there still be a rate cut?

The combination of reserve requirement reduction, MLF continuation and volume increase, as well as the resumption of 14 day reverse repurchase and interest rate reduction, have released clear signals of stable growth policies.

Market analysis generally believes that, driven by the implementation of policy combinations, new credit and social financing in September are expected to continue a significant rebound trend, and the upward trend of market interest rates will also be effectively curbed, which may shift to a stable and declining trend.

Will there be further interest rate cuts in the future?

"The domestic policy space is still sufficient, but the threshold for reducing reserve requirements and interest rates has been raised again in the short term. This is mainly due to the economy showing a stable and positive trend, and the central bank's continuous efforts are gradually releasing policy effects. It is necessary to maintain a certain degree of patience and determination. At the same time, there may be potential risks in excessively loose policies," Zhou Maohua said.

The China International Capital Corporation (CICC) research report predicts that there is still room for interest rate cuts in the LPR within the year, with a range of 5-10BP. This may take the form of MLF driving the LPR down, or MLF remaining unchanged and LPR down separately.

Dongfang Jincheng Wang Qing predicts that interest rate cuts are still in the policy toolbox. Whether the MLF operating rate will continue to be lowered in the future mainly depends on the macroeconomic and real estate market trends before the end of the year, and this possibility cannot be completely ruled out. Considering that domestic prices will continue to remain at a low level in the coming period, it also provides favorable conditions for further lowering policy interest rates.