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CONTEXT
The People's Bank of China (PBOC) surprised markets this week by
first cutting several key rates including loan prime rate (LPR)
and reverse repo rate on Monday. It then conducted an
unscheduled MLF lending operation on Thursday, at steeply lower
rates.
The sequence was a departure from the past, as MLF rate changes
have historically been a precursor to LPR and deposit rate
changes. The central bank also introduced a new cash management
tool earlier this month in the form of temporary bond repurchase
(repo) agreements and reverse repos.
WHY IT'S IMPORTANT
China's central bank governor Pan Gongsheng said at the Lujiazui
forum in June that he wanted the seven-day reverse repo rate to
be the key benchmark.
Analysts say the PBOC is moving away from targeting money supply
and towards the price of money. That means controlling
short-term repo rates rather than the MLF, as the latter is used
more to bridge funding shortfalls at banks.
Investors are closely tracking changes in the PBOC's policy
transmission mechanism amid heightened bond market volatility,
as expectations rise for new steps to support a shaky economy
and prevent too much cash being parked in safe-haven bonds.
BY THE NUMBERS
The PBOC lent one-year MLF loans this week at 2.30%, down 20
basis points from its previous MLF loan, its largest cut since
April 2020.
Three days prior to that, the bank cut the seven-day reverse
repo rate to 1.7% from 1.8%, and LPR by the same margin.
KEY QUOTES
"The arrangement of the MLF operation after the LPR further
downplays the policy rate significance of the MLF, indicating
that changes in the rate do not carry policy signal
implications," the PBOC-backed Financial News reported on
Thursday, citing expert views.
"We are gradually shifting tracks, moving to the open market
operations (OMO) rate as our benchmark interest rate, linking it
to bond yields and the LPR," said Liu Yu, chief economist at
HuaXi Securities, in a webinar to investors.
(Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan
and Sam Holmes)
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