On February 18th, in order to maintain liquidity in the banking system’s reasonable abundance, the People’s Bank of China (hereinafter referred to as the "Central Bank") launched 105 billion yuan open market reverse repurchase operation and 500 billion yuan medium-term loan facility (MLF) operation. Among them, the 7-day reverse repurchase winning bid rate and MLF winning bid rate remained unchanged at 1.8% and 2.5% respectively. Due to the maturity of 499 billion yuan MLF in February, the central bank realized a net investment of 1 billion yuan in MLF, which was a sequel to the excess parity.
MLF interest rate is the central bank’s medium-term policy interest rate, which together with the 7-day reverse repo rate in the open market constitutes the central bank’s policy interest rate system. Although the MLF interest rate "staying put" means that the pricing basis of the loan market quotation rate (LPR) has not changed in February, some experts believe that the central bank’s RRR reduction and "targeted interest rate reduction" in early February are expected to drive the LPR quotation to be lowered separately.
Continuing the over-cropping, the MLF net investment in February was 1 billion yuan.
On February 18th, the central bank launched the MLF operation of 500 billion yuan, and the net investment of MLF in that month was 1 billion yuan, and the winning bid rate of MLF remained unchanged, realizing the continuation of excess parity.
Medium-term lending facilities and other liquidity tools can provide strong support for the total social financing and the reasonable growth of money and credit. In the past year, the central bank continued to renew MLF in excess every month, which promoted a moderate amount of money and credit and a stable pace. In the first two months of 2024, the central bank continued to over-renew MLF to maintain a reasonable and sufficient liquidity.
Wang Qing, chief macro analyst of Oriental Jincheng, believes that the first quarter of 2024 has entered a critical stage of steady growth. The excessive continuation of MLF will help to increase the medium and long-term liquidity of the banking system, support credit growth and the issuance of government and corporate bonds, and at the same time encourage banks and other financial institutions to participate in the resolution of local debt risks.
However, after the central bank launched the RRR cut operation at the beginning of the month and provided long-term liquidity of 1 trillion yuan to the market, the net investment scale of MLF in February was only 1 billion yuan. Some viewpoints believe that the continuation of MLF in February is mainly to release positive signals and reflect the total strength of monetary policy. Pang Yao, chief economist and research director of Jones Lang LaSalle Greater China, pointed out that the small increase in MLF in February may have the consideration of preventing capital arbitrage and capital idling and promoting the steady downward movement of the capital interest rate fluctuation center.
In terms of price, the MLF interest rate remained unchanged in February, which was in line with market expectations. At present, the economic operation continues to recover. In January, the financial data achieved a "good start", and after the central bank lowered the interest rates for small loans and rediscounts provided to financial institutions to achieve a "targeted interest rate cut", market institutions generally expected that the possibility of lowering the MLF interest rate was low.
In the view of Li Chao, chief economist of Zheshang Securities (601878), MLF interest rate adjustment is also constrained by exchange rate pressure in the short term. He believes that the current follow-up trend of the Federal Reserve’s monetary policy and the US fiscal policy is still uncertain, and the RMB exchange rate may remain volatile in the short term.
LPR quotation in February is expected to go down.
MLF interest rate is the central bank’s medium-term policy interest rate, which together with the 7-day reverse repo rate in the open market constitutes the central bank’s policy interest rate system. Although the MLF interest rate "staying put" means that the pricing basis of the loan market quotation rate (LPR) has not changed in February, some experts believe that the central bank’s RRR reduction and "targeted interest rate reduction" in early February are expected to drive the LPR quotation to be lowered separately.
In the fourth quarter of 2023, major domestic banks successively lowered the deposit interest rate, which eased the cost pressure on the debt side of banks. On January 25th, the central bank lowered the interest rate of small loans and rediscounts provided to financial institutions from 2% to 1.75%. Pan Gongsheng, governor of the People’s Bank of China, recently said at the press conference of the State Council Office that all these measures will help promote the quoted interest rate of the loan market, which is the benchmark of credit pricing, "that is, we call LPR down".
Insiders pointed out that since 2022, banks have actively lowered the deposit listing interest rate for four times, and the cost pressure on the debt side of commercial banks has been effectively alleviated, which has created favorable conditions for further reducing the credit cost of enterprise residents and improving the sustainability of the real economy.
At present, there is still a distance between the price level and the expected price target. Even if the nominal interest rate continues to decline, the low price level also leads to the high real interest rate. The People’s Bank of China’s Monetary Policy Implementation Report of China in the Fourth Quarter of 2023 clearly stated that it is necessary to "further promote the interest rate marketization reform and smooth the transmission channels of monetary policy." Zhong Lin Nan, a macro analyst of GF Securities (000776), said that this may refer to guiding commercial banks to reduce the entity financing cost on the basis of lowering the deposit interest rate and reducing the debt cost in the early stage, and transmitting the downward debt cost of financial institutions to the entity financing cost.
Many experts believe that the central bank’s comprehensive RRR cut and "targeted interest rate cut" will help promote the downward trend of LPR. In order to further reduce the financing cost of the entity sector, it is highly probable that the LPR quotation will be lowered in February. Wang Qing believes that the LPR quotation in February may be lowered separately, and it is expected that the LPR quotation for one year and more than five years will be lowered by 5 basis points respectively.
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