Monetary Policy Counter Cyclical Sustained Force Central Bank MLF Interest Rate Down 20 Basis Points On Schedule

Following the 7 day reverse repo rate cut of 20 basis points in March, the central bank announced on the 15 day that it will carry out the 1 year term lending facility (MLF) operation of 100 billion yuan, winning the bid rate of 2.95%, down 20 basis points compared with the previous period. Since then, the MLF rate has fallen below 3% for the first time in 3 years. In this regard, industry experts believe that the MLF interest rate reduction in line with the widespread market expectations, policy interest rate linkage adjustment, released the counter cyclical regulation continued to increase the signal.

"In response to the huge impact of the new crown pneumonia epidemic on the economic operation, the people's Bank of China lowered the 7 day reverse repo rate by 20 basis points to 2.2% in March 30th, and decided to reduce the excess deposit reserve interest rate from 0.72% to 0.35% from April 7th, and opened the lower limit of the interest rate corridor. Today, the MLF interest rate is reduced by 20 basis points, which is consistent with the reduction rate of the reverse repo rate, so as to ensure that the interest rate level of the different period policy will drop as a whole. Wen Bin, principal researcher of China Minsheng Bank, said.

In the view of Wang Qing, chief macroeconomic analyst at Dongfang Jincheng, the MLF interest rate cut is the same as the reverse repo rate. This shows that the policy interest rate system is adjusted in an interactive way, which is conducive to maintaining the orderly operation of the interest rate corridor. More importantly, the current stage of China's epidemic prevention and control has been further consolidated. However, the international epidemic continues to spread and the risk of downside of the world economy is aggravating. This represents a severe challenge to our foreign needs in the coming period and the downward pressure on the domestic economy. Wang Qing believes that the domestic macroeconomic policy needs to increase the momentum, and the MLF downgrade is 10 basis points larger than that in February, that is, a clear signal to increase the countercyclical adjustment of monetary policy.

It is worth mentioning that in April 3rd, the central bank announced that in order to support the development of the real economy, promote the support for small and micro enterprises, reduce the actual cost of social financing, the central bank decided to reduce the deposit reserve ratio by 1 percentage points for rural credit cooperatives, rural commercial banks, rural cooperative banks, village banks and city commercial banks operating in provincial level administrative regions only. It was implemented two times in April 15th and May 15th, with a reduction of 0.5 percentage points each time. The central bank official said that the targeted reduction could release a long-term capital of about 400 billion yuan, with an average of about 100 million yuan for each small and medium-sized bank.

In fact, in March, China's CPI rose rapidly, and inflation appeared downward inflection point. In addition, since the beginning of this year, the central bank has used the quantitative monetary policy tools such as RRR, refinancing, rediscount and MLF to encourage and guide financial institutions to support the real economy in the premise of maintaining a reasonable and abundant liquidity. In March, the growth rate of M2 and social financing regulation was higher than that of nominal GDP.

Wen Bin said that at the next stage, monetary policy should be dominated by quantitative tools and price oriented instruments. On the one hand, the interest rate curve can be pushed down as a whole by lowering interest rates, leading to a decline in the interest rate of corporate bonds and a reduction in the cost of direct financing. On the other hand, a timely and moderate reduction of the deposit benchmark interest rate will release the potential of LPR reform. The lending rate continued to decline.