Source: Wall Street News Author: Li Xiaoyin
The Central Bank of China carried out an MLF operation of 125 billion yuan today. The winning bid interest rate was 2.50%, the same as before. The 125 billion yuan MLF expires on the same day. Considering the implementation of ultra-long-term special treasury bonds, the Galaxy Securities macro team said that interest rate cuts may be imminent. Among them, the downgrade may arrive soon, and interest rate cuts may be in the second quarter.
On May 15, the Central Bank of China announced that in order to maintain reasonable and abundant liquidity in the banking system, the central bank launched a 2 billion yuan open market reverse repurchase operation and a 125 billion yuan medium-term loan facilitation (MLF) operation. The winning bid interest rates were 1.80% and 2.50%, respectively, the same as before.
According to Wind data, a reverse repurchase of 2 billion yuan expired today, and an MLF of 125 billion yuan expired. As a result, the central bank achieved zero investment and zero return through MLF this month.
In March, the central bank made a net return from MLF operations in that month, for the first time since November 2022. From December 2022 to February 2024, the central bank overextended the MLF for 15 consecutive months, and from March to April 2024, the MLF was reduced and renewed for 2 consecutive months.
Previously, MLF interest rates had remained unchanged for 8 consecutive months.
On May 13, the Ministry of Finance announced the issuance schedule for trillions of ultra-long-term special treasury bonds. Among them, it will tender on May 17 to issue 40 billion yuan of 30-year special treasury bonds, the first installment of this year.
The Galaxy Securities macro team proposed that interest rate cuts may be imminent. Among them, the downgrade may arrive soon, and the interest rate cut may be in the second quarter.
The team believes that interest rate cuts will drive a moderate recovery in inflation. The high MLF interest rate level impedes investment in the base currency. Combined with the downside of the M1 currency multiplier, it faced resistance to boosting inflation. Although the economy has achieved a good start, to avoid “tight and backward relaxation,” policies need to maintain sustainability, stimulate the financing needs of entities, and maintain reasonable credit expansion. At the same time, bank debt costs have declined, and net interest spreads are less constrained by interest rate cuts.
Zhang Yu, chief macro analyst at Huachuang Securities, believes that when the probability of falling interest rate cuts rises marginally, exchange rate flexibility is likely to increase. In terms of time, when overseas monetary policy is expected to change pigeons and fluctuations in external exchange rates increase, it may easily trigger interest rate cuts, and the period of accelerated issuance of government bonds may easily trigger downgrades. There is no conflict between “squeezing moisture” in financial data and “cutting interest rates”. It is necessary to block the leak of capital dripping (curbing capital idling) before interest rate cuts and cuts can have the effect of doing more with less.
However, there are also opinions that interest rate cuts may not be coming soon.
The China Merchants Securities macro team pointed out that the monetary policy, which has the primary goal of preventing low inflation and stabilizing the exchange rate, will adhere to the general tone of easing, but the performance method will switch from price easing last year to quantitative easing, and use fiscal and monetary coordination and structural refinancing to resolve policy transmission blockages. In the process of preparing to issue special treasury bonds and preventing capital idling and arbitrage, interest rate cuts may be difficult to implement in the short term.
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