CFIC Introduction
On the morning of July 22, the blockbuster continued, and the monetary policy ushered in a blockbuster operation, involving a number of key interest rates!
On the morning of July 22, the People's Bank of China played a set of "combination punches".
According to the website of the People's Bank of China, in order to optimize the open market operation mechanism, from now on, the 7-day reverse repurchase operation in the open market will be adjusted to a fixed interest rate and quantity bidding. At the same time, in order to further strengthen counter-cyclical adjustment and increase financial support for the real economy, from now on, the interest rate of 7-day reverse repo operation in the open market will be adjusted from the previous 1.80% to 1.70%.
Starting from this month, medium-term lending facility (MLF) participants who have the need to sell medium- and long-term bonds can apply for a phased reduction of MLF collateral.
In addition, the loan prime rate (LPR) on July 22 was 3.35% for 1-year LPR and 3.85% for LPR over 5 years, both of which were reduced by 10 basis points. In order to strengthen the management of expectations and promote a better connection between the LPR release time and the operating time of the financial market, the central bank said that from July 22, 2024, the LPR release time will be adjusted from 9:15 a.m. on the 20th of each month (postponed accordingly in case of holidays) to 9:00 a.m. Ren Tao, a distinguished researcher at the National Finance and Development Laboratory, said that the current Fed is expected to cut interest rates has risen sharply, and the external pressure has weakened significantly, which has opened up space for internal interest rate cuts to a certain extent. The decline in LPR sends a policy signal of stabilizing growth and promoting development, which is conducive to stabilizing market expectations, driving the financing cost of the real economy to further stabilize and decline, stimulate credit demand, and promote corporate investment. Looking ahead, there is likely to be limited downside for long-term interest rates due to multiple factors, which will help drive a positive yield curve.
The reduction in LPR for more than 5 years will reduce the interest burden on mortgage borrowers. Yan Yuejin, research director of the E-House Research Institute, said that the 5-year LPR interest rate cut will help further reduce the cost of housing loans. Judging from the trend of LPR, the first quarter of this year showed a trend of "breaking 4", that is, from 4.2% to 3.95%. At present, there is the second interest rate cut this year, which further guides the decline of housing loans and other costs. Based on the current mainstream mortgage interest rate in various places, that is, the pricing formula of "LPR-75 basis points", then the mainstream interest rate for the first home used to be 3.2%, but now it will drop to 3.1%. According to the repayment method of 1 million yuan loan principal and 30 years of equal principal and interest, the total mortgage interest will be reduced by nearly 20,000 yuan, and the monthly payment will be reduced by 55 yuan. If it is superimposed with the continuous interest rate reduction effect, then the monthly payment reduction effect is very obvious, which will help to combine with other policies to continue to reduce the cost of housing loans.
It is worth noting that the release time of the LPR has also been advanced, from 9:15 in the past to 9 o'clock, which can better connect with the operating time of the financial market. Analysts said that the opening hours of various financial markets are different, such as the money market, bond market and interest rate swap market start trading at 9 o'clock, and the stock market and treasury bond futures market start trading at 9:30 o'clock. Before the market opens, various financial market participants often formulate trading strategies and plans based on the latest economic and financial data of the day. As an important reference for the pricing of loan interest rates, the LPR is released at 9 o'clock in advance, which can better connect with the operating hours of various financial markets, and is conducive to equal access to information and fair transactions for different financial market participants. The 7-day reverse repo interest rate cut is conducive to increasing financial support for the real economyThe interest rate of the 7-day reverse repo operation in the open market has been reduced to 1.7% from 1.8% in the previous time, which is the first adjustment since August 2023. Experts said that the reduction of the policy rate is expected to be gradually transmitted to the real economy through the financial market, promoting the reduction of comprehensive financing costs, consolidating the positive trend of economic recovery, and breaking the negative cycle of declining long-term bond yields and weakening expectations.
It is worth noting that the decline in the interest rate of the 7-day reverse repo operation does not mean that the downside of long-term bond yields has opened. The central bank's cut in the 7-day reverse repo operation interest rate is intended to increase counter-cyclical adjustment and iron out short-term economic fluctuations; Medium- and long-term bond yields, on the other hand, reflect more of the long-term economic trend and should be evaluated from a cross-cyclical perspective. According to the analysis of industry insiders, the continuous decline in the current round of long-term bond interest rates has included the expectation of this interest rate cut, and even has a significant overshoot, which does not mean that it is necessary to follow the downward trend of the 7-day reverse repo operation interest rate and then continue to fall. In fact, the current interest rate on long-term bonds is too low, and the media is generally concerned about the potential risks. The excessively low interest rate on long-term bonds is also prone to self-realization of weak expectations, while the fundamentals of the mainland economy are positive for a long time. The central bank's interest rate cut will help support the economic recovery, boost medium- and long-term economic expectations, and also help drive the recovery of long-term interest rates. It is expected that in the future, the central bank will also take comprehensive measures, borrow and sell treasury bonds when necessary, correct and block the accumulation of bond market risks in a timely manner, and maintain a normal upward slope yield curve. The central bank is determined and has measures to stabilize market expectations.
In terms of the adjustment of bidding methods, it is understood that the open market bidding methods include price bidding and quantity bidding, the former of the winning bid price is determined by the game between supply and demand, there is theoretical uncertainty, and the latter price is given. In the past, the central bank's 7-day reverse repo operation in the open market used price bidding, and although the winning interest rate remained unchanged most of the time, it still needed to carry out daily operations to release a clear interest rate signal. Some authoritative sources said that the explicit indication of the open market operation interest rate is conducive to strengthening the policy attribute of the 7-day reverse repo rate. Considering that the 7-day reverse repo operation rate in the open market has basically assumed the function of the main policy interest rate, in order to enhance the authority of the policy interest rate and effectively stabilize market expectations, it is necessary to optimize the bidding method to a fixed interest rate, quantity bidding, and clearly indicate the operating interest rate, which is also a reflection of the sound market-oriented interest rate regulation mechanism. Since the beginning of this year, affected by factors such as the slow supply of long-term bonds and financial disintermediation, long-term bond yields have continued to decline rapidly, hitting a new low in 20 years, accumulating the risk of reversal in the bond market. The People's Bank of China has repeatedly warned of risks in the early stage, and announced on July 1 that it will carry out treasury bond borrowing operations to increase the supply of bond markets.
"The People's Bank of China has made another new move, which can effectively release the stock of long-term bonds in the market and further increase the scale of tradable bonds." Analysts said that the current MLF balance of more than 7 trillion yuan, and most of them use national bonds and local bonds as collateral, if participating institutions reduce the collateral and sell long-term bonds, a large number of bonds will be released, effectively alleviating the pressure of "asset shortage" in the bond market.
Ming Ming, chief economist of CITIC Securities, said that while the People's Bank of China "cut" short-end interest rates, it also strengthened long-term interest rate management. The People's Bank of China's balance sheet has a low scale of medium- and long-term bonds, and the borrowing operation has not yet landed, and after the open market operation rate cut landed, the MLF pledge was reduced in stages, that is, MLF participating institutions were encouraged to sell medium- and long-term bonds, which is conducive to suppressing the long-term impulse of market institutions on long-term interest rates after the interest rate cut.
Source of this article: China Financial Information Center Lujiazui Financial Network, synthesized from Xinhua Finance, Economic Reference Network, Shanghai Securities News, China Securities Journal
Editor: Liu Xiabing
WeChat editor: Wang Qian
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