Oct: $700B MLF Operation, Interest Rate Unchanged

• News
• 2024-06-06

The MLF operation interest rate remained unchanged in October, with an operation scale of 700 billion yuan.

On October 25th, the People's Bank of China conducted a medium-term lending facility (MLF) operation of 700 billion yuan, with a term of one year, a maximum bidding interest rate of 2.30%, a minimum bidding interest rate of 1.90%, and a winning interest rate of 2.00%. After the operation, the MLF balance stood at 6,789 billion yuan.

On the same day, the central bank carried out reverse repurchase operations of 292.6 billion yuan at a fixed interest rate and quantity bidding method. Looking solely at reverse repurchase operations, due to the maturity of 108.4 billion yuan in 7-day reverse repurchase on the same day, a net injection of 184.2 billion yuan was achieved.

Chief macro analyst Wang Qing stated that the MLF operation interest rate for October remained unchanged, mainly because after the central bank announced the interest rate cut arrangement on September 24th, the MLF operation interest rate had already been significantly reduced by 30 basis points on September 25th. This means that the October MLF operation interest rate had been preemptively lowered and has also basically approached the corresponding interbank certificate of deposit maturity yield. This is the main reason why the LPR quote was reduced this month while the MLF operation interest rate remained stable.

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Previously, on October 16th, there was an MLF maturity of 789 billion yuan, and the central bank conducted reverse repurchase operations of 642.4 billion yuan for 7 days on the same day to offset it. In addition, to offset the impact of reverse repurchase maturities and tax periods in the open market, the central bank has recently carried out a series of large reverse repurchase operations. For example, on October 23rd and October 24th, reverse repurchase operations of 792.7 billion yuan and 798.9 billion yuan for 7 days were conducted, respectively.

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank, told First Financial that the central bank's simultaneous conduct of MLF and reverse repurchase operations, along with the net injection of funds, demonstrates the central bank's intention to flexibly use various tools to maintain a reasonable and sufficient market liquidity, which helps to stabilize market expectations.

Pang Ying, Chief Economist of JLL Greater China, said that this MLF operation is a reduced quantity and flat rate renewal, which maintains the control of monetary policy while enhancing the precision of monetary policy control.

In Wang Qing's view, it should be pointed out that the scale of the current month's operation is still high, and the reduction is not significant, aiming to maintain the liquidity of the banking system in a reasonable and sufficient state. Coupled with the recent clear capital replenishment arrangements for large banks, it will support commercial banks in increasing credit supply in the fourth quarter. He judged that new bank loans will recover and increase year-on-year from October. This is an indispensable important point for boosting economic growth momentum at present.

Looking forward, the MLF operation interest rate will remain stable within the year. Wang Qing believes that the policy interest rate was significantly reduced in September, and the fourth quarter will enter a period of observing policy effects, making the possibility of further rate cuts smaller. At the same time, the current MLF operation interest rate has basically fallen to the corresponding interbank certificate of deposit maturity yield, and the necessity of further reduction is also weakening. In terms of operation volume, considering that the MLF maturity in the last two months before the end of the year will be as high as 145 billion, coupled with the peak period of government bond issuance in the fourth quarter and the increased credit supply by banks, it is expected that MLF will continue the situation of large-scale renewal in October.

Central Bank Governor Pan Gongsheng recently revealed that before the end of the year, depending on the market liquidity situation, there will be opportunities to further reduce the reserve requirement ratio by 0.25 to 0.5 percentage points.Based on this, Pang Ming analyzes that, as we wait for a larger amount of MLF (Medium-term Lending Facility) maturities in the subsequent months, the intensified implementation of incremental fiscal policies, and the liquidity facing strong seasonal disturbances at the end of the year and quarter, a comprehensive use of various monetary policy tools such as reserve requirement ratio cuts and interest rate reductions will be necessary. These measures should take into account both internal and external balances, manage cross-cycle adjustments, promptly replenish liquidity, and reduce the cost of bank funds and social financing costs.