1. People's Bank of China Governor Pan Gongsheng has sent a signal to further improve the market-based interest rate regulation mechanism; 2. Previously, the MLF rate, which was used as the medium-term policy rate, often deviated from the trend of market rates with the same period, causing market confusion. In the future, the policy color of the MLF rate should be gradually weakened; 3. The direction of future LPR reform should be to generate a quote that both borrowers and lenders feel is fair, and use it as a pricing reference for loans.
On June 19th, Caixin reported that at the Lujiazui Forum today, PBOC Governor Pan Gongsheng signaled further improvement of the market-oriented interest rate control mechanism. He expressed that the policy color of the policy interest rate for other period policy tools should be diluted, and the reform and improvement of the loan market quoted interest rate (LPR) should be coordinated with the moderate narrowing of the interest rate corridor width. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.
Reporters from Caixin have interviewed industry insiders who have noted that in recent years, the MLF rate, which was previously a medium-term policy rate, often deviated from the trend of the same period of market rates, causing confusion in the market. In the future, the policy color of the MLF rate should be gradually diluted. In addition, LPR quotes do not necessarily need to be linked or referenced to MLF rates. The future direction of LPR reform should be to generate a quote that both borrowers and lenders believe is fair and to use it as a reference for loan pricing. In addition, as the future financial total volume target fades, price regulation will play a more important role in the implementation of monetary policy. In this context, it may be appropriate to narrow the width of the interest rate corridor and send clearer signals on the objective of interest rate control to the market.
Pan Gongsheng pointed out today at the Lujiazui Forum that there is a need to further improve the market-oriented interest rate control mechanism. "We can consider clarifying a short-term operating interest rate of the central bank as the main policy interest rate. Currently, the 7-day reverse repo operation rate has basically performed this function. The interest rate of other period monetary policy tools can dilute the policy color and gradually smooth out the transmission relationship from short to long. "
Pan Gongsheng emphasized that the loan market quoted interest rate (LPR) will continue to be reformed and improved, focusing on the problem of some quoted interest rates significantly deviating from the actual most favorable customer interest rate, and further improving the quality of LPR quotes to more accurately reflect the level of loan market interest rates.
What are the "other period monetary policy tools" that need to dilute the policy interest rate color? Experts told reporters from Caixin that it may refer to the MLF rate.
According to experts, the previous policy interest rate of the PBOC included short-term policy rates and medium-term policy rates. In recent years, short-term market interest rates have revolved around the policy interest rate, and the guidance effect of the policy interest rate is better. However, the MLF rate, which was previously a medium-term policy rate, often deviated from the trend of the same period of market rates, which may cause confusion for the market.
"From the experience of major developed economies, central banks mainly focus on managing short-term interest rates, and the effect of market determination of long-term interest rates is usually better," experts said. Therefore, gradually diluting the policy color of the MLF rate, and then smoothing the interest rate transmission mechanism from short to long for various monetary policy tools, is an important direction for improving the market-oriented interest rate control mechanism in the next stage.
Pan Gongsheng also pointed out today the need to send clearer signals on interest rate control objectives to the market if we are to consider further leveraging interest rate control in the future. In addition to the need to clarify the main policy interest rate, it may also be necessary to moderately narrow the interest rate corridor.
Pan Gongsheng also stated that improving the loan market quoted interest rate (LPR) is a priority, and efforts should be focused on improving the quality of LPR quotes, especially for the issue of some quoted interest rates significantly deviating from the actual interest rate offered to the most favored customers.
Experts told reporters from Caixin that LPR is the loan interest rate of financial institutions for their most favorable customers. In theory, financial institutions can form loan interest rates for their most favorable customers based on various factors such as funding costs and risk levels, and use a certain formula to generate an LPR quote.
"As we can see, LPR quotes themselves do not necessarily need to be linked or referenced to MLF rates. Currently, due to various factors, banks' LPR quotes do not completely and accurately reflect their actual most favorable customer loan interest rates. This problem is similar to that faced by financial institutions in developed economies before the reform of LIBOR," experts noted.
Experts suggest that in general, the future direction of reform should strive to generate a quote that both borrowers and lenders believe is fair, and use it as a reference for loan pricing. Some research has also proposed exploring using market benchmark interest rates like SOFR as pricing benchmarks for floating-rate loans.
Pan Gongsheng mentioned that if we consider further leveraging interest rate controls in the future, there may also be a need to send clearer signals on interest rate control objectives to the market. Besides clarifying the main policy interest rate, it may also be necessary to moderately narrow the interest rate corridor width.
Currently, our country's interest rate corridor is formed by the SLF rate as the upper limit and the excess reserve deposit interest rate as the lower limit. In the future, we may be able to appropriately narrow the width of the interest rate corridor and send clearer interest rate control signals on the objective to the market.
Pan Gongsheng introduced that our country's interest rate corridor has initially taken shape, with the SLF rate as the upper limit and the excess reserve deposit interest rate as the lower limit. Generally, this width is relatively large, which is advantageous to fully play the role of market pricing and maintain sufficient flexibility.
Industry insiders have noted that our country's interest rate corridor width is relatively large, about 245BP, which is significantly higher than that of major developed economies. This wider interest rate corridor system arrangement makes sense historically, mainly to fully play the role of market pricing and maintain sufficient flexibility. However, some trade-offs exist. The market's interval of acceptability for the PBOC's interest rate control policy is not very clear, leaving some room for questions.
Experts believe that in the future, with the fading of the target for total finance, price regulation will play a more important role in the implementation of monetary policy. In this context, there is a need to appropriately narrow the width of the interest rate corridor and send clearer signals on interest rate control objectives to the market.