On December 13, the Financial Alliance reported (Editor: Yang Bin) that the interbank time deposit yield, which had been flat for a long time, recently opened a downward channel, with the one-year AAA interbank time deposit yield declining more than 20BP in two weeks. Besides the self-regulatory reforms in interbank deposit pricing bringing a turning point for its trend, the 'moderately loose monetary policy' may provide more downward space for time deposit yields.

A trader believes that the current neutral interest rate is around 1.80%. If the 7-day reverse repo rate decreases by 20BP, the one-year time deposit rate will approach 1.30% in the future, providing a 50BP support to the real economy.

Compared to the 'smooth' decline of interest rate Bonds, the interbank time deposit yield had been resistant for a long time. Since August, the one-year AAA interbank time deposit yield has oscillated within a Range of 1.85%-2.00%. It wasn't until the last week of November that the interbank time deposit yield accelerated its decline, dropping from 1.85% on November 28 to 1.69% on December 12.

Figure: AAA interbank time deposit yield trend

(Source: Wind Data, organized by Financial Alliance)

Zhang Wei, chief of Fixed Income at China Merchants, pointed out in previous Research Reports that the difficulty in lowering time deposit yields is mainly due to a certain funding gap still existing on the liabilities side of major Banks. Additionally, the substantial increase in local Refinancing Bonds issuance in late November has consumed Bank excess reserves, making it hard to lower time deposit yields.

The self-regulatory reforms in interbank deposit pricing have brought a turning point for the trend of interbank time deposit yields. On November 29, the market interest rate pricing self-regulation mechanism work meeting reviewed and approved the 'Self-regulatory initiative to optimize the self-regulation management of non-bank interbank deposit rates', integrating non-bank interbank current deposit rates into standardized management, which should reasonably determine the rate level in reference to the public market's 7-day reverse repo operation rate and introduce 'rate adjustment bottoming clauses'.

A trader explained that the so-called 'monetary policy transmission efficiency' refers to the interest rate spread between the 7-day OMO and the one-year time deposit. To enhance the efficiency of monetary policy transmission, 'the regulatory focus is to address potential loopholes that may affect monetary policy transmission, such as interbank deposits and manual interest supplements.'

'If the future monetary transmission efficiency improves to a sufficiently high level, the one-year time deposit rate will merge with the 7-day OMO rate, compressing the spread between the time deposit and the 7-day OMO to around 5 basis points.' said the aforementioned trader.

Zhang Wei previously pointed out that the interest rate of off-bank demand deposits is gradually converging towards the current policy rate level of 1.5%, corresponding to a reduction space of over 25 basis points. The downward trend of interbank deposit rates is leading to a decline in interbank time deposit rates through price ratio effects, and the one-year time deposit rate is expected to approach the range of 1.6%-1.7%.

The latest market data today shows that the yield on one-year AAA interbank time deposits has fallen by another 5 basis points, reaching 1.64%.

This week's Politburo meeting and Central Economic Work Meeting mentioned 'moderately loose monetary policy' for the first time since 2011, attracting wide market attention.

Since crossing the month, the short-term funding situation has not significantly loosened. The weighted average price of DR001 exceeded 1.5% on Monday, and today it is around 1.40%-1.45%; the weighted average price of DR007 exceeded 1.8% earlier this week and has fallen back to 1.7%. Last week, the central bank net withdrew 1,132.1 billion yuan, and this week there was a slight injection of 184.4 billion yuan.

So what exactly is 'moderately loose monetary policy'? The aforementioned trader introduced the concept of a 'neutral interest rate': 'If a policy interest rate neither restricts nor supports the economy, then this rate is a neutral rate. A moderately loose policy means that the actual policy rate can provide sufficient support for the real economy.'

Today, the yield on 10-year government bonds has dropped below 1.8%. As long-term bonds have declined faster, the spread between the 10Y government bonds and the 1Y time deposit has been compressed, currently at 13 basis points.

The selection of neutral interest rates has no clear conclusion in the market. The aforementioned traders believe that the current neutral interest rate is around 1.80%. An OMO interest rate cut of 20 basis points is expected to bring the one-year time deposit rate to around 1.30%, providing a support of 50 basis points for the real economy.