What does the new round of deposit rate adjustment mean?

At the end of 2023, domestic commercial banks ushered in another round of centralized adjustment to reduce deposit interest rates. First, the major state-owned banks took the lead in lowering the interest rates on time deposits, and then the joint-stock commercial banks successively made adjustments. According to the website of a state-owned bank, the interest rates for three-month, half-year and one-year fixed deposits and lump sum deposits were all reduced by 10 basis points, 20 basis points for two-year periods, 25 basis points for three-year and five-year periods, in addition, the interest rate for call deposits was reduced by 20 basis points, and the interest rate on large deposits was reduced by up to 30 basis points. The interest rates of the six major state-owned banks have basically been lowered by 10-25 basis points for fixed deposits and withdrawals of all tenors. At present, the adjustment of deposit interest rates of joint-stock commercial banks is similar. According to the chain from large state-owned banks to joint-stock banks and then to small and medium-sized banks, the market expects that in early 2024, the deposit interest rates of small and medium-sized banks will also be adjusted accordingly.

At present, the central bank has mentioned the trend of bank interest rate adjustment in the fourth quarter monetary policy meeting. The central bank said, "improve the formation and transmission mechanism of market-oriented interest rates, give full play to the guiding role of the central bank's policy interest rate, release the effectiveness of the reform of the loan market prime interest rate and the market-oriented adjustment mechanism of the deposit interest rate, and promote the steady decline of corporate financing and household credit costs." Actively revitalize the financial resources that are inefficiently occupied and improve the efficiency of capital use. "This means that from the perspective of interest rate policy, the central bank will still adjust according to the previous practice, that is, adjust the deposit interest rate> adjust the open market operation (MLF, etc.) policy rate> adjust the LPR quotation rate to guide the market interest rate down, and promote the reduction of financing costs. In this regard, after this round of deposit rate adjustment, it is likely to usher in a new round of LPR reduction in the first quarter of 2024.

From the perspective of monetary policy, the central bank has remained "prudent" in the fourth quarter of 2023, and returned to the policy framework of "precise control" under the condition of completing the "2023 economic growth target". At present, judging from the changes in the PMI index, economic growth in the fourth quarter of 2023 has indeed slowed down again. According to data released by the National Bureau of Statistics, in December, the manufacturing purchasing managers' index (PMI) was 49.0%, down 0.4 percentage points from the previous month, and the level of manufacturing prosperity has fallen, continuing to decline for three consecutive months, and is in the contraction range. The non-manufacturing business activity index was 50.4 percent, up 0.2 percentage points from the previous month, higher than the critical point, indicating that the expansion of the non-manufacturing industry has accelerated. The composite PMI index was 50.3%, which was in the boom range, but also fell for three consecutive months. If this sluggish economic growth continues, the domestic economy is likely to continue to slow in the first quarter of 2024, which may be the main reason why monetary policy needs to act.

Of course, in the view of researchers at the Anbang think tank, even if the central bank adjusts interest rates, it is more of a signal of monetary policy in the new year and improves market confidence. One or two rate cuts will not change the tone of "steady". Judging from the situation of the regular monetary policy meeting in the fourth quarter, the judgment of the meeting on the economic situation is basically the same as that of the regular meeting in the third quarter, which is to point out that "the economy is rebounding and the momentum is increasing", while emphasizing that "it is still facing challenges such as insufficient effective demand and weak social expectations". In this case, the countercyclical adjustment of monetary policy still mainly plays the role of "stabilizing the economy" rather than "strong stimulus".

In addition, considering the continuous narrowing of commercial banks' interest rate spreads, the profitability of the banking industry is also under increasing pressure. The continuous decline in deposit interest rates will also put pressure on banks to absorb deposits, making the expansion of assets face a bottleneck. Therefore, the actual effect of interest rate cuts on the economy is also declining when the scale of credit is already very large, and the ability of banks to expand credit is facing contraction due to the impact of the decline in deposit rates. In this case, the central bank's wording to guide financing costs is "stable and falling", which shows that the frequency of future reductions will not be too much, and the magnitude will not be too large.

In terms of market liquidity, the central bank said in the fourth quarter monetary policy meeting that "it is necessary to increase the implementation of the monetary policy that has been introduced." Maintain reasonable and abundant liquidity, guide the reasonable growth and balanced distribution of credit, and keep the scale of social financing and money supply in line with the expected targets of economic growth and price levels. Enhance the guiding role of government investment and policy incentives, improve the multiplier effect, and effectively stimulate more private investment. Promote the recovery of low prices and keep prices at a reasonable level. "If we consider the sluggish domestic inflation in 2023, if inflation returns to target in the new year, it will be necessary to increase the money supply. At the same time, historically, commercial banks tend to focus on promoting credit in the first quarter, and in this case, of course, the money supply needs to remain resilient to avoid becoming a drag on economic recovery.

Under the policy framework of precise regulation, the increase in money supply can be achieved in a variety of ways, including adjusting market launches such as MLF, and can also be achieved through RRR cuts. At present, the central bank has achieved "reasonable abundance" of cross-border liquidity by increasing reverse repo, and with the expiration of short-term liquidity, it is still necessary to inject long-term liquidity in an appropriate way in the new year to ensure the stability of market confidence and expectations. Of course, in response to the continuous expansion of the economic scale, the new money supply cannot fully explain the "looseness" and "tightness" of monetary supply and demand, which can only be verified after the fact through inflation and other indicators. This means that under the steady tone, the corresponding adjustment will not be too large, and the monetary supply will still be a process of "precise easing". In the absence of surprises, moderation will be the keynote of monetary policy for quite some time.

Final analysis conclusion: At the end of 2023, domestic commercial banks ushered in another round of centralized adjustment to reduce deposit interest rates. This round of cross-year deposit rate adjustments has created conditions for further LPR cuts in the first quarter of 2024. While monetary policy remains "prudent" in the fourth quarter of 2023, domestic economic growth once again shows a tendency of "weak follow-up", which means that future monetary policy support is still indispensable. However, there are limits to such support and it is constrained by policy space. (Source: Anbang Consulting)