welcome "interest rate cut" again! the central bank cut the reverse repo rate by 5 basis points

Posted by lipsius at 2020-03-27

Welcome "interest rate cut" again! The central bank cut the reverse repo rate by 5 basis points

After the central bank cut the MLF interest rate on November 5, the central bank "cut the interest rate" again every 13 days, and cut the reverse repo rate of open market operation by 5 basis points.

On November 18, the people's Bank of China announced that it had launched a seven-day reverse repo of 180 billion yuan in the form of interest rate bidding on the same day, with the bid winning rate of 2.5%, down 5 BP compared with the previous one, which is the first time that the seven-day reverse repo rate has been lowered in more than four years.

After the announcement of the good news, the inter-bank cash bond yield fell 4-5bp, while the 10-year bond active bond yield fell below 3.2%. After the opening of the stock market, securities companies soared in a straight line, and the Shanghai stock index rose more than 0.3% to recover 2900 points.

In less than two weeks, the "interest rate cut" has been repeated. For the market, the signals released by the central bank to increase the counter cyclical adjustment are very clear. Some people also believe that this is the start of the "broad currency" momentum. However, the market is divided on whether this means that China will start the interest rate reduction cycle. In addition, with the "double guarantee" of MLF and reverse repo rates successively lowered, the latest LPR quotation cut ushered in on Wednesday has almost no suspense. Many analysts expect that the one-year LPR is expected to be reduced by 5-10bp.

Maintain the normal interest margin between MLF and reverse cycle plus code

The last 7-day reverse repo rate was cut in October 2015, more than four years later. It is interesting that the 7-day reverse repo rate was cut again. However, it is also expected that the reverse repo rate will be cut this time. When the central bank cut the 1-year medium-term lending facility (MLF) rate by 5 basis points in early November, some analysts believed that the reverse repo rate would also be cut by the same points.

Zhang Xu, chief fixed income analyst of Everbright Securities, told the securities times that the main reason for the reverse repo rate to follow the MLF interest rate is to maintain the normal shape of the policy interest rate curve. In fact, for most of the time since February 2016, the spread between the one-year MLF and the seven-day reverse repo rate has remained at around 75bp. Monetary policy conducts cross term transmission through the yield curve. The form of the policy interest rate curve is the basis of the market yield curve. Therefore, if the yield curve is too flat or too steep, it will hinder the transmission of monetary policy. The 7-day reverse repo rate cut this time is more conducive to improving the transmission efficiency of monetary policy.

In addition to maintaining the normal shape of the policy interest rate curve, the reverse repo and MLF interest rates are regarded as the target policy interest rates of the central bank by the outside world. In less than two weeks, the two major policy interest rates have been successively lowered, which also released a clear signal to the market to increase the counter cyclical regulation. In the third quarter monetary policy report released by the central bank on Saturday, the central bank proposed to increase the intensity of counter cyclical adjustment, and no longer put forward the "master gate of money supply" to release the signal of stable and loose monetary policy to the market.

Wang Qing, chief Macro Analyst of Dongfang Jincheng, believes that the 7-day reverse repo rate reduction is expected to reverse the overall marginal rise of interest rates in the previous four months in the money market, and the dr007 average interest rates in August and October have been higher than the same period last year, which means that from November, the momentum of "broad currency" is expected to recover. On the one hand, it will reduce the average marginal capital cost of financial institutions and push the 1-year LPR to resume downward trend on Wednesday, thus reducing the actual loan interest rate of enterprises. On the other hand, this is also in the context of the current macro-economic downward pressure, the regulators released a clear counter cyclical policy adjustment to strengthen the signal, which will help stabilize market confidence and the macro-economic operation in the fourth quarter.

Wen bin, chief macro researcher of Minsheng Bank, also said that the central bank's reduction of the reverse repo rate is a concrete manifestation of strengthening the counter cyclical regulation. Since November, the central bank has carried out an MLF operation of 600 billion yuan, adding today's reverse repo operation of 180 billion yuan for seven days, reflecting that the Central Bank continues to use the policy tool combination of "open market operation reverse repo + MLF", with a long-term and short-term combination, to ensure a reasonable and sufficient liquidity and a stable liquidity forecast.

"Double guarantee" to reduce the capital cost of banks

As the two major policy interest rates of the central bank, reverse repo and MLF play an important role in guiding the short-term capital price trend and the medium and long-term capital price trend of the money market respectively. At the same time, the short-term and medium-term market interest rates will influence each other, and jointly affect the bank's debt side capital cost, and then affect the asset side pricing such as loans.

However, the impact of reverse repo and MLF on the debt side costs of financial institutions in different maturities is not very clear. Color, chief economist of Founder Securities, told the securities times that the central bank lowered the reverse repo rate, indicating that under the current situation, the central bank does not intend to distinguish between MLF and open market operating interest rate policies. This is mainly because MLF is only a one-year period, and there is a half year period before MLF, while reverse repo is also relatively long-term, in fact, there is a certain degree of term overlap. It is difficult to say that MLF is linked to real economy interest rate and reverse repurchase is linked to financial system interest rate. The bank estimates the financing cost and determines the loan market pricing rate (LPR), so it is suitable to follow the reduction of the reverse repurchase rate, which is conducive to maintaining the stability of monetary policy.

For financial institutions, with the "double guarantee" that both MLF and reverse repo rates are lowered, the cost of liabilities will be significantly reduced. According to Zhongtai Securities Research Report, although the volume of reverse repo and even the whole open market operation is not large, the significance of open market operation is not "volume", but "price", that is, the management of market short-term interest rate, and the short-term interest rate will affect the trend of the long-term interest rate. In order to reduce the financing cost of the real economy, the most important thing is to reduce the cost of the debt side of financial institutions, and to reduce the cost of the debt side of financial institutions, the most important interest rate reduction is to reduce the short-term capital interest rate.

"A large part of the liabilities of financial institutions are financial liabilities. For example, the financial liabilities of medium-sized banks account for 40%, and the cost of financial liabilities is closely related to the trend of short-term market interest rate. When the deposit rate itself is low and hard to reduce, to reduce the cost of the debt side of financial institutions, what can be reduced on the margin is the short-term fund interest rate. " Zhongtai securities research report said that to guide the short-term interest rate to continue to decline, we need to lower the more instructive reverse repo operating interest rate. Under the current monetary policy control framework, the interest rate reduction without reducing the reverse repurchase rate is similar to the "false" interest rate reduction.

Has China's interest rate cut cycle started?

Since November, a series of practical operations of monetary policy by the central bank have made the market see the strength of increasing counter cyclical adjustment. But in less than two weeks, the policy interest rate has been lowered twice. Does that mean that China has also started the interest rate reduction cycle?

In this regard, the market has different views. Color told reporters that at present, it can not be said that the central bank has entered the interest rate reduction cycle. In the dilemma of upward inflation and downward economic growth, the central bank may be very cautious in implementing the interest rate policy, "building channels first, then channeling water", and reducing interest rates through reform. In contrast, China's legal reserve ratio is relatively high, and there is still room for reduction. To reduce the long-term financing cost of the entity enterprise through timely reduction of the legal reserve should be the policy optimization.

Zhang Xu told reporters that the market usually equates "loose monetary policy" with "interest rate cut". We believe that the connotation and extension of monetary policy are far broader than "interest rate cut". At present, monetary policy needs to properly cope with the downward pressure of the economy and reduce the financing cost of the real economy. There are many things that can be done around this goal. Commercial banks are restricted by their own capital, liquidity and interest rate. Compared with the "interest rate cut", it is better to alleviate these three constraints. For example, since the beginning of the year, the people's Bank of China has supplemented banks and capital with perpetual bonds as a breakthrough, and carried out CBS operations to support the issuance of perpetual bonds. Up to now, commercial banks have issued a total of 496.6 billion yuan of perpetual bonds, which further improves the ability of the banking system to support the real economy.

According to Zhongtai Securities Research Report, the most important signal conveyed by MLF interest rate reduction is that these two interference factors may not be obstacles to monetary policy easing, and structural problems still need to be solved by structural policies. The central bank has taken the first step, first let MLF which is obviously on the high side return to the market, and China's interest rate reduction cycle has just begun.

Mingming, deputy director of CITIC Securities Research Institute, believes that generally speaking, monetary policy is still in the direction of marginal easing, and we need to pay attention to the disturbance of rhythm and strength to the market. The next step should be to pay attention to the pace of monetary policy, and structural monetary policy can still be expected.

The monetary policy statement of "I-oriented" in the central bank's monetary policy implementation report does not deny the space for monetary easing, but depends on economic growth. To actively maintain the normal monetary policy space means that the central bank is more accurate and efficient in grasping the operation rhythm and strength of monetary policy. " Mingming said that the combination of subsequent monetary policy operations is expected to be the following: (1) a small rate cut, for example, the MLF operating interest rate has been slightly reduced; (2) the adjustment of the open market reverse repo operating interest rate continues to be postponed, transforming the original one-time interest rate cut (that is, the MLF and reverse repo simultaneously reduce interest rates) into two-time interest rate cuts (the MLF and reverse repo successively reduce interest rates); (3) the targeted reduction continues; (4) Other institutional monetary policy tools, such as MLF, refinancing, rediscount, PSL, and MPA assessment; (5) creating other institutional monetary policy tools.

Statement: the securities times strives to make the information true and accurate. The contents mentioned in the article are for reference only and do not constitute substantive investment suggestions, so the operational risk shall be borne by itself.