To maintain a reasonable and adequate level of liquidity in the banking system, on September 25th, the People's Bank of China (PBOC) conducted a Medium-Term Lending Facility (MLF) operation of 300 billion yuan, with a term of one year, a highest bidding rate of 2.30%, a lowest bidding rate of 1.90%, and a winning rate of 2.00%. After the operation, the balance of MLF stood at 6,878 billion yuan.
The winning rate of this MLF operation was 30 basis points lower than the previous value. On September 24th, PBOC Governor Pan Gongsheng announced a reduction of 0.2 percentage points in the 7-day reverse repo operation rate, from the current 1.7% to 1.5%. Pan Gongsheng expected that after this adjustment of policy rates, the MLF rate would likely decrease by about 0.3 percentage points. Therefore, the downward movement of the MLF rate this time is in line with market expectations.
Analysts pointed out that the MLF winning rate is the first market-based rate to decline after the recent announcements of reserve requirement ratio (RRR) cuts and interest rate cuts, reflecting the central bank's guiding role in market-based rates through the reduction of policy rates (7-day reverse repo operation rate). The decline in the MLF rate helps to save on bank funding costs, and it is expected that through internal bank pricing transmission, the Loan Prime Rate (LPR) and deposit rates will also follow suit, which will continue to boost market confidence and support stable economic growth.
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It is worth noting that the release time for MLF operations was previously at 9:20 AM, and it was combined with the public market reverse repo operations on the same day. However, on September 25th, it was released separately at 8:30 AM.
Analysts also stated that the separate release of MLF and public market operations will make the differential positioning of future tools clearer. In the past, the results of MLF operations were combined with the public market reverse repo operations on the same day. This time, the MLF operation "started anew" and was released earlier under the re-lending—Medium-Term Lending Facility section, further reflecting the difference from the 7-day reverse repo operation rate as a policy rate, and promoting the MLF to return to its positioning as a medium to long-term liquidity supply tool.
Reduced volume renewal, in conjunction with RRR cuts
The announcement shows that the scale of the September MLF operation was 300 billion yuan, while the maturity scale of MLF for the month was 591 billion yuan, which means that the MLF operation reduced by 291 billion yuan this month.
Analysts believe that the reduced volume renewal of MLF in September was to coordinate with the RRR cut, aiming to maintain a reasonable and adequate level of liquidity. On September 24th, after the central bank announced that it would cut the RRR by 0.5 percentage points and release 1 trillion yuan in long-term funds, the long-term liquidity gap in the banking system was significantly narrowed, and the necessity for the central bank to continue with an equal volume renewal of MLF decreased. At the same time, the central bank also revealed that there may be another RRR cut of 0.25 to 0.5 percentage points before the end of the year, which is expected to reasonably offset the MLF maturities in the fourth quarter and maintain a stable market funding situation.
"The central bank's unexpected RRR cut will inject a large amount of long-term liquidity into banks, which will lead to a corresponding decrease in banks' demand for MLF operations," said Wang Qing, Chief Macro Analyst at Orient Gold & Credit.
According to Pan Gongsheng's statement of two or even three RRR cuts within the year, the released liquidity could reach up to 2 trillion yuan. Wen Bin, Chief Economist at Minsheng Bank, said that the central bank's announcement to reduce the reserve requirement ratio by 0.5 percentage points and provide 1 trillion yuan in long-term liquidity, if another 0.25 to 0.5 percentage points are reduced within the year depending on market liquidity conditions, the maximum released liquidity could reach 2 trillion yuan, driving down bank liability costs by about 8 billion yuan.The 300 billion yuan Medium-term Lending Facility (MLF) operation is not a small scale. In Wang Qing's view, against the backdrop of the relatively abundant liquidity in the current banking system, the central bank continues to carry out a large amount of MLF while announcing a reserve requirement ratio cut, possibly for the following two main reasons: First, it is currently the peak period for the issuance of government bonds. The central bank's large amount of MLF continuation can effectively support the issuance of government bonds. Second, maintaining a relatively abundant medium and long-term liquidity in the banking system provides support for banks to increase credit allocation in the fourth quarter. This is expected to reverse the situation of a relatively large year-on-year decrease in new RMB loans from January to August, and it is also an important point of effort for current stable growth.
As for the reason for the MLF "interest rate cut" of 30 basis points, several interviewees told reporters that the current low maturity yield of bank certificates of deposit is an important driving force for the downward adjustment of the MLF operation interest rate.
Zhao Lian Chief Researcher Dong Ximiao said that previously, the 1-year MLF interest rate was 2.30%, higher than the interbank certificate of deposit interest rate, and the enthusiasm of financial institutions to apply was relatively low. After the 30 basis point decline, the enthusiasm of financial institutions to bid for MLF is expected to increase. The decline in MLF interest rates helps to further reduce the funding costs of financial institutions and effectively meet the medium and long-term liquidity needs of the market. The further renewal of MLF at the end of the month further indicates that the 7-day reverse repo operation interest rate has replaced the 1-year MLF interest rate as the main policy interest rate. The further continuation of MLF further strengthens the policy position of the 7-day reverse repo operation interest rate, which helps to further straighten the interest rate transmission mechanism from short to long.
Wang Qing said that due to the relatively moderate scale of bank credit issuance in the previous period and the slower pace of government bond issuance, the current liquidity in the banking system is relatively abundant. The maturity yield of 1-year commercial banks (AAA grade) interbank certificates of deposit in August was 1.92%, significantly lower than the MLF operation interest rate before this adjustment. Since there is a certain substitutability between banks financing in the money market through interbank certificates of deposit and banks financing through MLF to the central bank, coupled with the current fixed quantity and interest rate bidding of MLF operations, the operation interest rate in August has a larger decline, which is also a reflection of interest rate marketization.
Some analysts also believe that the decline in MLF interest rates helps to save bank funding costs. Through internal bank pricing transmission, it is expected that LPR and deposit interest rates will also decline accordingly. This will continue to boost market confidence and support stable economic growth.
The reporter also noticed that this is the first time the central bank has announced the MLF bid price, and the operation transparency has been further improved. Starting from July, the central bank clearly stated in the announcement that the MLF operation adopts a fixed quantity and interest rate bidding method, and the winning interest rate will be flexibly determined according to the institution's bid.
The so-called interest rate bidding means that participating institutions can choose multiple interest rates when bidding, and the final winning result can better reflect the supply and demand situation of funds. This month, the central bank announced the MLF bid interest rate for the first time. The highest institution bid interest rate was 2.3%, and the lowest was 1.9%, reflecting the differences in medium and long-term fund demand among different institutions. This is also in line with what Pan Gongsheng mentioned at the 2024 Lujiazui Forum about "improving the transparency of monetary policy."
In addition, the MLF operation used to be published in the "Open Market Operations Transaction Announcement" column, but this time the MLF operation was published in the "Medium-term Lending Facility Work Information" column, which used to be the position for announcing the MLF scale and balance data at the beginning of the month.
All of this shows that the policy interest rate color of MLF interest rates has been significantly diluted. On July 22, the central bank announced that the 7-day reverse repo operation in the open market adopts a fixed interest rate and quantity bidding, further indicating the policy interest rate, and the market interest rate is more closely linked to the 7-day reverse repo operation interest rate. Starting from August, the central bank adjusted the monthly MLF renewal time to after the monthly LPR quotation release, and the LPR and MLF were further decoupled.Wen Bin stated that the central bank is focusing on managing short-term interest rates, such as the 7-day reverse repo rate, with mid-term interest rates primarily driven by market determination. By gradually diminishing the policy implications of the Medium-term Lending Facility (MLF) rate, and thereby straightening out the interest rate transmission mechanism of various monetary policy tools from short to long-term rates, this has become an important direction for improving the interest rate marketization regulatory mechanism in the next phase.
In his view, considering the current situation where MLF has a "large volume and high price," to diminish its policy interest rate status, it is first necessary to reduce the volume of MLF. In the past, the central bank released liquidity and injected base money through MLF and other means. In the future, this may primarily be achieved through reserve requirement ratio cuts or central bank purchases of government bonds. As the volume of MLF gradually shrinks, its own policy interest rate status will also be weakened. When the policy can effectively guide the mid-term interest rates, it is not ruled out that MLF may eventually exit the historical stage.
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