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Central bank cuts interest rates to help stabilize growth

Author: Sue Moon Source: China Financial and Economic News Published: 2019-11-25

In the past month, the People's Bank of China has continuously implemented interest rate reduction operations, which has caused widespread concern and strong response. The market generally believes that lowering the medium-term borrowing facility (MLF) interest rate, the open market operation (OMO) interest rate, and the market loan quoted interest rate (LPR) show that the central bank is committed to stabilizing growth, stabilizing expectations, and reducing costs.

On November 5, the People's Bank of China carried out MLF operations of 400 billion yuan, which was basically the same as the amount due on that day. The deadline was one year, and the bid interest rate was 3.25%, which was the first five-basis-point reduction since February 2016. On November 18, the people The bank restarted the RMB 180 billion 7-day reverse repo operation, and the winning bid rate fell by 5 basis points to 2.50%, which is the first time that the open market reverse repo operation rate has been reduced for more than 4 years. On November 20, the National Interbank Offered Center announced LPR It was: 4.15% for 1 year and 4.80% for 5 years and above, down 5 basis points respectively.

At present, China's monetary policy framework is shifting from quantitative control to price control. Compared to "quantity", "price" has become a more important factor in understanding monetary policy. How to understand the recent reduction of MLF, OMO interest rates and LPR by the central bank?

The MLF interest rate is one of the policy rates that the central bank has focused on in recent years. The current LPR quotes are derived using the "MLF + points" method. The MLF interest rate reduction will guide LPR downward; LPR, as a commercial bank's loan interest rate for its highest quality customers, Other loan interest rates are generated based on factors such as the cost of funds of each bank, market supply and demand, and risk premiums, plus or minus points; therefore, the actual loan interest rate of enterprises in the real economy is linked to changes in MLF interest rates and LPR.

The People's Bank of China recently released the third quarter monetary policy implementation report that the People's Bank of China launched a medium-term lending facility to facilitate the rise of market risk appetite and boosted confidence on the 5th of this month. The decline in the interest rate for bidding in the medium-term loan facility is a reflection of the reduction in the average marginal capital cost of financial institutions, which helps promote the reduction of the actual loan interest rate of enterprises and the reduction of social financing costs.

Unlike the "expected" that the LPR followed by the decline of the MLF interest rate, the central bank cut the 7-day reverse repurchase rate somewhat higher than expected in the context of the current CPI rise. As one of the short-term policy rates of the central bank, lowering the 7-day reverse repurchase rate will help calm short-term liquidity fluctuations, reflecting the central bank's care of banks' short-term funding; at the same time, it will also have a significant impact on reducing the cost of bank liabilities .

In the third quarter of the monetary policy implementation report, the previous "timely and moderately countercyclical adjustments" reference was adjusted to "strengthening countercyclical adjustments", and it was proposed that the central bank will properly respond to the short-term downward pressure on the economy. Securities research institutions point out that in recent years, MLF interest rates and OMO interest rates have often been adjusted simultaneously, and it is reasonable to reduce the OMO interest rate after reducing the MLF interest rate. This shows that although it is indicated that "in the future, we need to be alert to the divergence of inflation expectations", the central bank will not simply tighten monetary policy because of structural inflation, and stable growth and cost reduction are still the top priorities at present.

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