On June 17th, Caixin reported that the People's Bank of China continued the MLF operation this month under reduced volume and flat prices. The market's previous expectations of reductions in reserve ratios and interest rates were both dashed.

Today, the People's Bank of China carried out a 182 billion yuan one-year MLF operation, with the winning bid rate remaining unchanged from before. Currently, the MLF has been stable for 10 consecutive months. Many experts told Caixin reporters that this is mainly due to two reasons: first, after the sharp decline in long-term market interest rates, the People's Bank of China has repeatedly warned of the risk of fluctuating interest rates; second, the economic growth rate exceeded expectations in the first quarter and macroeconomic data in the second quarter was volatile, and the current economic policies are in an observation period.

The market believes that the reduction in MLF volume and flat prices in June means that the window for reserve ratio and interest rate reductions needs to be pushed back, but the necessity for interest rate cuts is still there. Since the beginning of this year, the People's Bank of China has repeatedly stated that there is still room for monetary policy, but the effects of previous policies are still evident. From the perspective of the timing of reserve ratio and interest rate cuts, the third quarter or a more appropriate window.

Financial institutions have weak demand for MLF. The People's Bank of China has continued its MLF operation under reduced volume and flat prices.

"There may be some fluctuation in liquidity at the end of the quarter, but overall the disturbance of the capital market in June is limited and the trend towards a loose situation can still be maintained. It is expected that the Central Bank will continue to moderately inject liquidity through reverse repurchase operations at the end of the month to flatten the phase disturbance of credit issuance, wealth management fund withdrawals, and other periods, thus maintaining stable operation of the capital rate." Wen Bin, chief economist of Minsheng Bank, told Caixin reporters.

On June 17th, the People's Bank of China carried out a 182 billion yuan one-year MLF operation with a winning bid rate of 2.50%, which was the same as before. In view of the 237 billion yuan one-year MLFs due to expire on the same day, the Central Bank has reduced its volume this month, and the scale of the reduction is 55 billion yuan. In addition, the Central Bank carried out a 4 billion yuan seven-day reverse repurchase operation on the same day, with a winning bid rate of 1.80%, which was the same as before.

From the perspective of the overall capital market in June, although the demand for liquidity across the quarter has increased, the overall situation is still loose and stable. As the tax payment date approaches the middle of the month, interest rates may be slightly disturbed and rise slightly. Previously, in terms of short-term funding, the DR007 central axis gradually declined from its peak of 1.89% in March to 1.85% in May, and the OMO interest rate spread continues to narrow; in terms of medium and long-term funding, the 1Y-NCD monthly average value has dropped from around 2.6% at the beginning of the year to 2.07% at the end of May, deviating from the central axis of MLF policy.

The interest rate of interbank certificates of deposit remains low and the interest rate spread between MLF and them is widening, which also shows that financial institutions have weak demand for MLF. As of June 14th, the yield of AAA-rated one-year interbank certificates of deposit had fallen to 2.04%, and the interest rate spread with the same period of MLF had widened to 46 basis points.

From the perspective of the speed of government bond issuance, government bond issuance in May has clearly accelerated. In June, the frequency of issuance of super-long-term special national bonds has increased, corresponding to a relatively slow issuance of general government bonds. The supply pressure of government bonds in June may be slightly reduced compared to May. In addition, June is a big month for fiscal expenditure, and it is expected that fiscal deposits will decrease by about 900 billion yuan during the month, which will also result in a certain amount of liquidity injection.

"Since the beginning of the year, under the continuation of a stable and loose capital market, the People's Bank of China has no intention of investing too much money. Apart from a net positive investment in May, net withdrawals have continued in other months." Wen Bin pointed out that the Central Bank's daily reverse repo has now dropped to 2 billion yuan, indicating that the capital market is still balanced and loose.

Since August 2023, the MLF operation rate has remained stable for 10 consecutive months. Orient Securities analysts believe that this is mainly due to the People's Bank of China's repeated warnings of interest rate fluctuation risks after the large decline in long-term market interest rates. Although market interest rates have stabilized somewhat, they are still far from policy interest rates.

"At the same time, economic policies are currently in an observation period in light of the fact that the economic growth rate exceeded expectations in the first quarter and macroeconomic data in the second quarter was volatile. Considering the low level of prices and the need to improve economic growth potential, reducing the MLF operation rate in the third quarter is still seen as a possible policy option." Wang Qing, chief macro analyst at Orient Securities, believes.

There is still a need for future interest rate cuts, and the window is expected to open in the third quarter.

Recently, several small and medium-sized banks have lowered their deposit interest rates, which has ignited market expectations for a new round of deposit interest rate cuts. At the same time, with the landing of interest rate cuts by the European Central Bank and a significant easing of US inflation data, the external constraints facing domestic monetary easing have marginally eased. However, the market points out that interest rate cuts still face dual constraints from internal and external environments.

Guangda Bank's macro market financial researcher Zhou Maohua told Caixin that from the domestic environment, the space for interest rate cuts is sufficient, but price instruments need to take into account factors comprehensively and guard against potential risks. "Considering the current economic and price recovery, fully releasing the effectiveness of previous policies, while taking into account both domestic and international balance, the People's Bank of China is expected to give priority to guiding the stable reduction of financing costs for entities through structural tools and reform measures, and increasing support for priority emerging areas." Zhou Maohua believes that by using rediscounting tools to increase support for weak points in the real economy and priority emerging sectors, financing costs can be reduced. At the same time, financial institutions can use the automatic adjustment mechanism of deposit interest rates according to market conditions to tap the potential of LPR reform.

Wen Bin pointed out that from an internal perspective, stable interest rate spreads and risk prevention are still influencing factors. The current net interest rate spread of commercial banks is still continuing to narrow, and on the other hand, if the MLF interest rate is reduced, it will also guide the bond market interest rate to continue to decline, deviating from the desired level of the current Central Bank and easily causing multiple risks.

Since this year, the central bank has repeatedly stated that there is still room for monetary policy, but the effect of previous policies is still showing. Although there is space for reserve ratio cuts and interest rate cuts in the short term, it is difficult to implement. From the perspective of the timing of reserve ratio cuts and interest rate cuts, the third quarter may be a more appropriate window.

"The necessity of interest rate cuts is still there, and the window is expected to open in the third quarter. If foreign demand weakens significantly in the second half of the year, it will be necessary for monetary policy to make a new round of effort. In the context of insufficient demand for entity financing and high real interest rates, reducing nominal interest rates may still be an important policy choice." Wen Bin believes that although the adjustment of policy interest rates is subject to "dual constraints", in the future, it will become more and more like a "mandatory option" from an "optional option".

Oriental Jin Cheng pointed out that with the weakening of the impact of financial "squeezing water" and the acceleration of bank credit investment, it is expected that the demand of banks for MLF will increase in the third quarter, and MLF operations are expected to shift to increasing quantity and continuing to operate.