Financial Services Association, April 15 (Reporter Cao Yunyi) Today, the central bank carried out a 100 billion yuan 1-year medium-term loan facilitation operation (MLF). Since the 170 billion yuan MLF expires this month, a net return of 70 billion yuan was returned. After 15 months of continuous net investment, the central bank changed its past style and has been shrinking operations for 2 consecutive months. The background also shows that the current banking system has abundant liquidity.

A number of analysts told the Financial Federation reporter that the economic data for the first quarter were generally better than expected, and the effects of the previous increase policy are still being released, so it is not urgent to cut interest rates in the short term. However, the MLF downsizing operation was mainly due to the abundant liquidity of the banking system and did not release a signal of policy contraction. Entering the second quarter, credit is expected to increase year-on-year as the steady growth policy continues to gain strength and the impact of “balanced investment” is reversed. At that time, MLF will also resume additional work.

Against the backdrop that MLF operating interest rates remained stable in April and bank net interest spreads are likely to narrow further in the first quarter, the LPR quotes for the two term types will remain unchanged in April. If interest rates on deposits are lowered, lowered, or implemented in the future, it will create room for LRP to be lowered again

Recovery in economic data combined with abundant liquidity, the central bank contracted and continued for two consecutive months

“Mainly based on recent data, the overall macroeconomic, commodity prices, and physical financing situation is ideal. At the same time, the effects of previous policy increases are still being unleashed, and short-term interest rate cuts are not high.” In response to the central bank's MLF downsizing sequel this month, Zhou Maohua, a macro researcher at the Financial Markets Department of Everbright Bank, told the Financial Federation reporter.

Judging from recently released social finance data and economic data for the first quarter, RMB loans increased by 3.09 trillion yuan in March, and RMB loans increased by 9.46 trillion yuan in the first quarter. This is a decline from the high base for the same period last year, but still an increase of more than 1 trillion yuan over the same period in 2022. The economic data for the first quarter were generally better than expected, prices rebounded moderately, and the effects of credit support were gradually showing.

“This MLF downsizing operation did not release a signal of policy contraction. Entering the second quarter, with the steady growth policy continuing to gain strength and the reversal of the influence of 'balanced investment', credit is expected to increase year-on-year. At that time, MLF will also resume additional work.” Wang Qing, chief macro analyst at Dongfang Jincheng International Credit Evaluation Co., Ltd., said.

Wang Qing pointed out that macroeconomic data on industrial production and investment were strong at the beginning of the year. In March, the official manufacturing PMI index ended the previous five-month contraction and rose sharply to an expansion range. The macroeconomic economy continued to pick up its upward trend in the first quarter. As a result, there is currently little urgency to implement policy interest rate cuts.

Judging from the central bank's recent reverse repurchase operation, the central bank has no intention of investing too much capital in the context of stable liquidity, so there are traces of MLF downsizing operations this month. As of April 12, a total of 18 billion yuan had been invested in reverse repurchases during the month, 856 billion yuan at maturity, and a net return capital of 838 billion yuan.

Wen Bin, chief economist at Minsheng Bank, analyzed to the Financial Federation reporter that interest rates on interbank deposits have declined rapidly and sharply recently, interest spreads with MLF have further widened, and financial institutions' demand for MLF is not strong. In an environment of steady capital easing and declining market returns, some institutions currently still have obvious pro-cyclical, long-term, and leveraging practices. The average daily turnover of interbank pledged repurchases is often at a high level of 7 trillion yuan or more. MLF downsizing and renewal will help reduce leverage, prevent idling, and enhance the stability of interest rates in the capital market.

Furthermore, from an external perspective, expectations for the Federal Reserve to cut interest rates have weakened, the US dollar index has risen sharply, and pressure to depreciate the RMB has increased accordingly, hampering domestic monetary policy easing. Keeping policy interest rates unchanged will help stabilize the foreign exchange market.

Downgrades and targeted tools are better than cutting interest rates in the latter half of the second quarter or opening up room for LPR cuts

As the anchor for LPR interest rate pricing, with MLF interest rates unchanged, this month's LPR interest rate is also expected to remain stable. Furthermore, since the February LPR was lowered beyond expectations, there is little need for a recent reduction in LPR interest rates. Experts believe that downgrades and targeted tools are preferred over interest rate cuts. A new round of deposit listing interest rate cuts may begin in the latter half of the second quarter, which will create room for another reduction in LRP at that time.

Zhou Maohua believes that at present, effective domestic demand is insufficient, the price level is below the trend level, and the prospects for external demand are complex. Further recovery of the domestic economy requires partial fiscal and monetary policy support. Total instruments such as downgrades and interest rate cuts are still commonly used to effectively improve the real economy's financing environment and stimulate consumption and investment, and there is plenty of room for corresponding policy tools. However, specific implementation will depend on macroeconomic recovery, price recovery, and the pace of real estate recovery.

“Based on factors such as the focus of monetary policy this year, pressure on banks' net interest spreads, and internal and external equilibrium, it is expected that when domestic economic performance does not clearly deviate from the recovery track, downgrades and targeted tools will be given priority over interest rate cuts.” Zhou Maohua expects that this year the central bank will focus on balance and stock revitalization in terms of credit investment, maintain reasonable and abundant liquidity, and cooperate with active fiscal policy implementation.

“Recently, some local small and medium-sized banks are following up on deposit interest rate cuts, and regulations require that all deposits be self-regulated in pricing by the end of April 2024. If the effects of the previous policy are not effectively reflected, a new round of deposit listing interest rate cuts may be initiated in the latter half of the second quarter to control bank debt costs and ease the pressure on narrowing interest spreads.” Wen Bin believes that a reduction, downgrade, or implementation of interest rate cuts on deposits will create room for another reduction in LRP.

Wang Qing said that it is more likely that the central bank will lower MLF interest rates around the middle of the year. First, this will send a clear signal of the strength of a steady growth policy, which will help promote consumption, expand investment, improve social expectations, and promote a moderate recovery in price levels. Second, MLF interest rate cuts will drive LPR quotes to be adjusted in conjunction, effectively reducing financing costs for the real economy. The low interest rate environment will also provide more favorable conditions for mitigating local debt risks. More importantly, this will guide residents' mortgage interest rates to be lowered more quickly and push the real estate industry to achieve a soft landing as soon as possible.