After the central bank cut the MLF interest rate on November 5, the central bank cut interest rates again on the 13th, cutting the reverse repo rate for open market operations by 5 basis points.

On November 18, the central bank announced that the seven-day reverse repurchase rate of 180 billion yuan was carried out by way of interest rate bidding, and the winning interest rate was 2.5%, which was lower than before by 5bp. This was the first cut in the seven-day reverse repurchase rate in more than four years.

After the announcement of the good news, the yield on interbank cash bonds fell below 3.2%. Brokerage stocks soared in a straight line after the opening of trading, with the Shanghai Composite Index rising more than 0.3 per cent to recover 2900 points.

With interest rates cut again in less than two weeks, the signal from the central bank to step up counter-cyclical adjustment is very clear to the market, and there is also a view that this is the start of the momentum of "broad currency". However, the market is divided over whether this means that China has begun a cycle of interest rate cuts. In addition, with MLF and reverse repo interest rates have cut the "double guarantee", this Wednesday ushered in the latest LPR price cut almost no doubt, many analysts expect an one-year LPR is expected to cut 5-10bp.

Maintain the normal spread between MLF and counter-periodic plus code

The last time the seven-day reverse repo rate was cut in October 2015, more than four years later, the seven-day reverse repo rate cut again attracted people's attention.However, the cut in the reverse repo rate is also to be expected. When the central bank cut the one-year medium-term lending facility (MLF) rate by 5 basis points in early November, some analysts thought that the reverse repo rate would also be reduced by the same point.

Zhang Xu, chief fixed income analyst at Everbright Securities, told the Securities Times that the reverse repo rate follows the MLF interest rate downward mainly to maintain the normal shape of the policy interest rate curve. In fact, the spread between the one-year MLF and the seven-day reverse repo rate has remained around 75bp for most of the time since February 2016. Monetary policy is transmitted across periods through the yield curve, and the shape of the policy interest rate curve is the basis of the market yield curve, so too flat or too steep the yield curve will hinder the transmission of monetary policy. the reduction of the 7-day reverse repo rate is more conducive to improving the transmission efficiency of monetary policy.

In addition to maintaining the normal shape of the policy interest rate curve, as reverse repurchase and MLF interest rates are regarded by the outside world as the target policy rates of the central bank, in less than two weeks, two important policy interest rates have been reduced one after another, sending a clear signal to the market to increase counter-cyclical adjustment. In the third-quarter monetary policy report released by the central bank on Saturday, it was proposed to step up counter-cyclical adjustment, not to mention "keeping a good general floodgate of the money supply" and to send a signal of sound and loose monetary policy to the market.

Wang Qing, chief macro analyst at Oriental Jincheng, believes that the seven-day reverse repo rate cut is expected to reverse the overall marginal rise in money market interest rates in the previous four months, and the average DR007 interest rate in August and October has been higher than the same period last year, meaning that the "broad currency" momentum is expected to return from November. On the one hand, this will reduce the average marginal cost of capital of financial institutions and promote a return to the downward trend of 1-year LPR on Wednesday, thereby lowering real lending rates for companies. On the other hand, this is also in the context of the current macroeconomic downward pressure, regulators released a clear signal of increased counter-cyclical policy regulation, which will help to stabilize market confidence and macroeconomic operation in the fourth quarter.

Wen Bin, chief macro researcher of China Minsheng Banking Corp, also said that the central bank's reduction of the reverse repo rate is a concrete manifestation of strengthening counter-cyclical regulation. Since November, the central bank has carried out 600 billion yuan of MLF operations, superimposed today's 180 billion yuan of seven-day reverse repurchase operations, reflecting that the central bank continues to match the length of the policy tool combination of "open market operations reverse repurchase + MLF" to ensure reasonable and adequate liquidity and stabilize liquidity expectations.

"double guarantee" to reduce the cost of Bank Capital

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

However, the impact of reverse repurchase and MLF on the debt-side costs of financial institutions in different maturities is not very clear. Founder Securities Chief Economist Color told the Securities Times that the central bank's cut in the reverse repo rate shows that the central bank has no intention of distinguishing between MLF and open market interest rate policies. This is mainly because MLF is only one year, before there is a half-year, and reverse repurchase also has a longer-term, in fact, there is a certain degree of overlap. It is difficult to say that MLF is linked to real economy interest rates and reverse repo to financial system interest rates. Banks comprehensively estimate the financing cost and finally determine the loan market pricing rate (LPR), so it is appropriate to follow the reduction of the reverse repo rate, which is conducive to maintaining the stability of monetary policy.

For financial institutions, with the "double guarantee" of lower MLF and reverse repo rates, it is naturally conducive to a more significant reduction in debt costs. Zhongtai Securities Research News believes that although the amount of reverse repurchase and even the entire open market operation is not large, under the price-based regulation mode of monetary policy, the important significance of open market operation is not "quantity", but "price". That is, the management of market short-term interest rates, and short-end interest rates will affect the trend of medium-and long-term interest rates. In order to reduce the financing cost of the real economy, the most important thing is to reduce the debt-side cost of financial institutions, and to reduce the debt-side cost of financial institutions, the most important interest rate reduction is to reduce the short-end capital interest rate.

"A large part of the liabilities of financial institutions are financial liabilities. For example, the financial liabilities of China's medium-sized banks account for 40%, and the cost of financial liabilities is closely related to the trend of short-end market interest rates. In the case that the deposit interest rate itself is low and difficult to reduce, in order to reduce the debt-side cost of financial institutions, the marginal reduction is the short-end capital interest rate. Zhongtai Securities Research report said that in order to guide short-end interest rates to continue to decline, it is necessary to cut the more instructive reverse repo operation rate. Under the current framework of monetary policy regulation, interest rate cuts that do not reduce reverse repo rates are in fact similar to "fake" interest rate cuts.

Has the interest rate cut cycle started in China?

Since November, a series of monetary policy operations of the central bank have shown the market to intensify countercyclical adjustment, but does it mean that China has also started the interest rate reduction cycle by cutting policy interest rates twice in less than two weeks?

In this regard, the market has different views. Color told reporters that it is not yet possible to say that the central bank has entered the cycle of interest rate cuts. In the dilemma of rising inflation and economic downturn, the central bank may implement the interest rate policy very cautiously, "build the canal first and then open the water" and cut interest rates through reform. In contrast, China's legal reserve ratio is relatively high, there is still room for downward adjustment, through timely reduction of statutory reserves to reduce the long-term financing costs of entity enterprises should be the policy optimization.

Zhang Xu told reporters that the market usually equates "monetary policy easing" with "interest rate cuts". We believe that the connotation and extension of monetary policy are far broader than "interest rate cuts". At present, monetary policy needs to properly deal with the downward pressure on the economy and reduce the financing costs of the real economy. There is a lot that can be done around this goal. The credit of commercial banks is restricted by their own capital, liquidity and interest rate. Compared with "interest rate reduction", targeted relief of these three constraints can have a better effect. For example, since the beginning of the year, the people's Bank of China has used perpetual debt as a breakthrough to replenish banks and capital, and carried out CBS operations to support sustainable bond issuance. So far, commercial banks have issued a total of 496.6 billion yuan of perpetual bonds, further improving the ability of the banking system to support the real economy.

Zhongtai Securities Research News believes that in the case of high pig prices and real estate resilience, the most important signal of the cut in MLF interest rates is that these two interfering factors may not be obstacles to monetary policy easing, and structural problems still have to be solved by structural policies. The central bank has taken the first step to let the obviously high MLF return to the market, and the interest rate reduction cycle in China has just begun.

Mingming, deputy director of CITIC Research Institute, believes that on the whole, monetary policy is still moving 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 focus on the pace of monetary policy, structural monetary policy can still be expected.

The 'self-oriented' monetary policy statement in the central bank's monetary policy implementation report does not deny that there is room for monetary easing, but depends on economic growth. To take the initiative to maintain the normal monetary policy space means that the central bank is more accurate and efficient in grasping the rhythm and intensity of monetary policy operation. Mingming said that it is expected that the following combinations of monetary policy operations may be: (1) a small cut in interest rates, such as a slight reduction in the previous MLF operating rate; (2) a further delay in the adjustment of the interest rate in the open market reverse repo operation, turning the original one-off rate cut (that is, MLF and reverse repo rate cut at the same time) into two interest rate cuts (MLF and reverse repo); and (3) continuing targeted rate cuts. (4) other institutional monetary policy tools such as MLF, re-loan, rediscount, PSL, and MPA assessment, etc. (5) create other institutional monetary policy tools.