(Yicai) July 16 — The People’s Bank of China reduced the size of its medium-term lending facility this month and is expected to continue on this path for the whole year to shift its focus on short-term operating rates, according to an expert.
The gradual shrinking of the MLF release volume will weaken the role of the MLF rate, which may lead to the complete retirement of the rate, said Wen Bin, chief economist at China Minsheng Bank. In the future, the PBOC may conduct policy transmission mainly through the seven-day reverse repurchase rate when making interest rate cut operations, he added.
China’s central bank yesterday released CNY100 billion (USD13.8 billion) worth of fresh funds into the financial system through one-year MLF operations and kept the rate unchanged at 2.5 percent. It replaced CNY103 billion worth that expire this month. It was the fourth time this year that the PBOC released less funds than the expiring ones this year.
The PBOC also injected CNY129 billion in seven-day reverse repo operations into the economy yesterday, with the interest rate remaining unchanged at 1.8 percent. It replaced CNY2 billion (USD275.3 million) worth that expired on the same day.
The moves aimed to offset the impact of tax payment peak and keep liquidity reasonable and ample in the banking system, the PBOC noted.
The PBOC introduced the MLF as a liquidity injection tool in 2014 before confirming its status as a medium-term policy rate in 2019. It then became a market rate after being linked to the loan prime rate.
Short-term market rates are usually closer to the PBOC’s operating rates, while MLF rates mainly diverge from market rates of the same maturity, Wen noted. Interest rates on one-year AAA-level interbank negotiable certificates of deposits range between 1.9 percent and 2 percent, much different from the MLF rate, Wen added.
“In the future, the PBOC will consider using a specific short-term operating rate as its main policy rate,” Governor Pan Gongsheng said at the 2024 Lujiazui Forum in Shanghai on June 19. “Seven-day reverse repo operations have basically assumed that role, with monetary policy tools of longer maturities having their policy rate roles weakened.”
On July 8, the PBOC announced it will carry out overnight temporary repo and reverse repo operations between 4 p.m. and 4.20 p.m. on working days to maintain reasonable and sufficient liquidity in the banking system and improve the accuracy and effectiveness of open market operations. The temporary repo and reverse repo rates will be 20 basis points lower and 50 bps higher than the seven-day reverse repo rate, respectively.
Based on the most recent seven-day reverse repo rate, the temporary repo operation rate is 1.6 percent, and the reverse repo operation rate is 2.3 percent.
Editors: Dou Shicong, Futura Costaglione
