The continuation of the Mid June Lending Facility (MLF) with reduced parity has disappointed the market's previous expectations for reserve requirement and interest rate cuts. On June 17th, the People's Bank of China launched an MLF operation of 182 billion yuan, with a winning bid interest rate of 2.5%, which remained unchanged from before. Due to the expiration of 237 billion yuan of MLF this month, the central bank achieved a net withdrawal of 55 billion yuan. For the latest operation, the industry believes that it is currently in the observation period of policy effectiveness, and the central bank has slightly reduced its volume and continued to operate, reflecting the fine regulation of liquidity and not releasing a tightening signal. In addition, considering the historically low net interest margin of banks, the market expects the loan market quoted rate (LPR) to remain unchanged in June. The window for reserve requirement and interest rate cuts continues to move backwards. The unchanged MLF operating rate is in line with market expectations. The MLF operating rate remained unchanged in June, marking the 10th consecutive month since August 2023 at this level. Analysts say that the MLF interest rate remains unchanged, in line with market expectations. This is mainly related to the current observation period of policy effectiveness, as well as the frequent regulatory reminders of long-term bond risks in recent times. Wang Qing, Chief Macro Analyst of Oriental Jincheng, believes that in the early stage, the long-term market interest rates experienced a significant decline, and the central bank has repeatedly warned about the risk of interest rate fluctuations; Recently, the long-term market interest rates have stabilized, but still deviate significantly from the policy interest rate center. In addition, the recent decline in loan interest rates may indicate that the urgency of lowering policy interest rates is not high. In Wang Qing's view, the economic growth in the first quarter exceeded expectations, and the macroeconomic data in the second quarter fluctuated significantly. Currently, the overall policy effect is under observation. This is also a background for the recent MLF operating rate to remain unchanged. Considering that the price level will continue to be low in the future and the economic growth momentum needs further improvement, lowering the MLF operating rate in the third quarter is still one of the important policy options. Shrinking the number of sequels does not mean tightening liquidity. Recently, the MLF investment has been relatively low, and the overall situation is in a state of shrinking or equal number of sequels. Industry insiders believe that the main factor is the low demand for MLF by commercial banks, which has not conveyed a signal of policy tightening liquidity. Wen Bin, Chief Economist of China Minsheng Bank, stated that several small and medium-sized banks have recently lowered their deposit interest rates, igniting market expectations for a new round of deposit interest rate cuts. Coupled with the central bank's continued attention and voice on ultra long bonds, it has triggered market adjustments in operational strategies. Many institutions have "avoided the long and taken the short", causing the deposit certificate interest rate to continue to operate at a low level. As of June 14th, the one-year AAA interbank certificate of deposit interest rate was 2.04%, and the reverse spread with the same term MLF spread expanded to 46 basis points. "The interbank certificate of deposit interest rate is still low, and the spread between MLF and its interest rate is widening. Financial institutions' demand for MLF is not strong, and the reduction and continuation of MLF can help maintain market supply and demand balance." Wenbin said. Wang Qing also stated that the recent low amount of MLF investment is not a signal of quantity contraction, mainly because the wholesale financing cost of banks in the money market is significantly lower than the cost of financing from the central bank through MLF. In the third quarter, with the gradual weakening of the impact of financial squeeze, the acceleration of bank credit investment, and the sustained high level of government bond issuance, the operational demand for MLF by banks will increase, and MLF is expected to turn to increasing volume for continuation. Based on factors such as stable MLF rates and historically low bank net interest margin, analysts predict that the LPR quotes for the two maturity varieties in June are likely to remain unchanged. Wen Bin believes that the LPR quotation for June is likely to remain stagnant. However, in order to reduce financing costs and maintain stable bank net interest margin, deposit interest rates still need to be further lowered, and may land as early as the middle to third quarter of the year, opening up space for LPR reduction. According to a research report by China International Capital Corporation (CICC), if the open market operating rate and deposit rate are not lowered, the possibility of separately lowering LPR in the short term is relatively low, thus avoiding the impact on the interest rates of existing loans. (Lai Xin She)