MLF policy interest rate color fading, interest rate corridor width will narrow
2024-06-28
The President of the People's Bank of China, Pan Gongsheng, recently revealed at the 2024 Lujiazui Forum that in the future, it may be considered to clarify a certain short-term operating rate of the central bank as the main policy interest rate. Currently, it appears that the 7-day reverse repurchase operating rate has basically taken on this function. The interest rates of other term monetary policy tools can dilute the color of policy interest rates and gradually streamline the transmission relationship from short to long. The relevant statement implies that the position of MLF as the primary policy interest rate will change. Why choose anchoring short-term interest rates as the main policy interest rate and downplay the policy interest rate color of MLF? What changes will China's interest rate corridor see? The policy interest rate function of MLF may gradually give way to the reverse repurchase rate. For a long time, MLF, as an important medium-term policy interest rate, has deeply influenced the interest rates of the money market and bond market. But in the future, this situation may not occur again. "The 7-day reverse repurchase operation interest rate will become a more important intermediate variable in monetary policy." Sun Binbin, the fixed income team of Tianfeng Research, stated. Huaxi Securities also believes that the benchmark interest rate function of MLF will weaken in the future, and the 7-day reverse repurchase rate may replace some of the functions of MLF. In particular, in the future, as the purchase and sale of treasury bond gradually replaces the MLF's function of funding, the function of MLF's policy interest rate may eventually be gradually transferred to the reverse repo rate. How did this important transformation come about? Some market experts have stated that short-term market interest rates fluctuate around policy interest rates, and the guidance effect of policy interest rates is good. However, MLF, which was previously a medium-term policy interest rate, often deviates from the trend of market interest rates over the same period, which may cause confusion in the market. Lu Zhengwei, Chief Economist of Industrial Bank, stated that since the beginning of this year, DR007 has fluctuated slightly around the 7-day reverse repurchase rate for most of the time, but the difference between the 1-year MLF and the 1-year interbank certificate of deposit rate is relatively large. When the growth of monetary credit has shifted from supply constraint to demand constraint, the guiding effect of MLF on the same term interbank certificate of deposit interest rate may be weakened. Market experts suggest that gradually weakening the policy interest rate color of MLF and streamlining the transmission mechanism of various monetary policy tools from short to long interest rates is an important direction for improving the market-oriented interest rate regulation mechanism in the next stage. The linkage with MLF may weaken the LPR or usher in a second reform. MLF, previously used as a policy interest rate, was an important link connecting financial market interest rates and real economy interest rates. After weakening the policy interest rate signal significance of MLF, how will the LPR closely related to entities evolve? The previous strong association between LPR and MLF will change. "The LPR quotation itself does not necessarily need to be linked or referenced to MLF." Some market experts say that LPR is the loan interest rate that financial institutions offer to the most favorable customers. In theory, financial institutions can combine various factors such as cost of funds and risk level to form loan interest rates for the most favorable customers, and form LPR quotations based on certain formulas. CITIC Securities research suggests that there is a possibility of additional LPR reductions in the coming months. Moreover, the central bank may further weaken the linkage between LPR and MLF, and LPR can also be adjusted while MLF remains unchanged. "LPR may face a second round of reform." In the view of Lu Political Commissar, if the policy interest rate color of MLF weakens, the LPR quotation mechanism may need to be adjusted. The US LPR quotation is directly based on the federal funds rate plus points, and perhaps in the future, China's LPR quotation can also be formed on the basis of short-term interest rates. There are also studies in the industry that suggest referring to international experience to explore using market benchmark interest rates such as SOFR as interest rate pricing benchmarks for floating loans. The future policy idea is to narrow the width of the interest rate corridor and look forward to the way of monetary policy to adjust interest rates. A major consensus in the industry is that the 7-day reverse repo interest rate may be the main policy interest rate for "interest reduction" in the future, the fluctuation range of short-term interest rates will be framed through the "interest rate corridor", and the trading of treasury bond will be the main popular adjustment method. Pan Gongsheng recently reiterated the auxiliary role of interest rate corridors in his speech, stating that "when regulating short-term interest rates, central banks usually use interest rate corridor tools as an auxiliary tool to 'frame' money market interest rates within a certain range.". This further strengthens the market's attention to interest rate corridors. In recent years, China has gradually established and improved interest rate corridors, and has initially built an interest rate corridor with the Standing Lending Facility (SLF) as the upper corridor and the Excess Deposit Reserve Rate as the lower corridor. Currently, the upper and lower limits of the interest rate corridor are 2.80% and 0.35% respectively, and the width of the interest rate corridor is 245 basis points. In the industry, the width of China's interest rate corridor is significantly higher than that of major developed economies. A wider interest rate corridor is difficult to accurately convey the central bank's price control guidance to the market, and the future policy approach is to narrow the width of the interest rate corridor. Narrowing the width of the interest rate corridor appropriately can convey clearer signals of interest rate regulation targets to the market. Zhang Xu, Chief Analyst of Fixed Income at Everbright Securities, stated that if key currency market interest rates such as DR007 fluctuate too much, the noise generated by the fluctuations can easily affect the transmission of signals. From the recent trend of money market interest rates, it can be seen that the market interest rates have been able to operate smoothly around the policy interest rate center, and the fluctuation range has significantly narrowed. "We should also recognize the necessity and possibility of further reducing volatility in the future." Zhang Xu stated that moderately narrowing the width of the interest rate corridor is one of the measures to reduce the volatility of market interest rates. At the same time, the decrease in market interest rate volatility also creates conditions for narrowing the interest rate corridor. (Lai Xin She)
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