Interest rate cuts can be expected.
Original title: Interest rate cuts can be expected
The central bank cut interest rates. On June 13th, according to the central bank’s disclosure, the interest rate of 7-day reverse repurchase was lowered by 10 basis points from 2% to 1.9%. This is also the first time that the central bank has lowered the reverse repo rate since August 2022.
It is worth mentioning that recently, banks have successively lowered the listing interest rate of RMB deposits, and the market has also warmed up expectations for interest rate cuts. What the market is more concerned about is the impact of this reverse repurchase interest rate cut on the RMB exchange rate, which is in the depreciation channel recently. How will the medium-term loan facility (MLF) and loan market quotation rate (LPR) change in June?
On the evening of the 13th, official website, the central bank, disclosed that the central bank lowered the convenient interest rate of standing loans, including 10 basis points to 2.75% overnight, 10 basis points to 2.9% in seven days and 10 basis points to 3.25% in one month.
The central bank cut interest rates by 10 basis points
After nearly 10 months, the central bank lowered the short-term policy interest rate again. According to official website, the central bank, in order to maintain liquidity in the banking system’s reasonable abundance, the central bank launched a 7-day reverse repurchase operation of 2 billion yuan by way of interest rate bidding on June 13th, and the winning bid rate was 1.9%, down 10 basis points from 2% before. The 7-day reverse repo rate reached the lowest level in history.
Since the end of May, the central bank has maintained the scale of land in the daily routine reverse repurchase. In the nine trading days in June, the scale of the reverse repurchase operation of the central bank was always 2 billion yuan. As a result of the 2 billion yuan reverse repurchase due on June 13th, the whole day achieved zero delivery and zero return.
Beijing business today reporter combed and found that this interest rate cut is also the first time that the central bank lowered the reverse repo rate since August 2022. On August 15th, 2022, the central bank simultaneously lowered the one-year medium-term lending facility (MLF) interest rate as the medium-term policy interest rate and the seven-day reverse repurchase bid-winning interest rate as the short-term policy interest rate by 10 basis points. In January, 2022, the central bank also lowered the MLF and reverse repurchase rates at the same time when carrying out the MLF operation in that month.
Since June, 2023, state-owned banks and several national joint-stock commercial banks have successively lowered the listing interest rates of current and medium-and long-term RMB deposits, among which deposit interest rate lowered the interest rates of 2-year, 3-year and 5-year RMB time deposits by 5 basis points to 0.2%, and lowered the interest rates by 10 basis points, 15 basis points and 15 basis points respectively. This move has caused the market to expect the central bank to cut interest rates. Many analysts expect that the central bank will lower the medium-and short-term policy interest rates when it announces the MLF renewal in June in the middle of the month.
Before June 15th, the central bank has taken the lead in lowering short-term interest rates. In response to this move by the central bank, Zhou Maohua, a macro researcher in the financial market department of China Everbright Bank, pointed out that the macro data since April mainly showed that the pace of domestic economic recovery was slow and the prospect of external demand was uncertain, and the pressure of fine-tuning macro policies increased. The central bank has cut interest rates and other measures to ensure that the economy does not deviate from the track of steady recovery.
"Looking back at a series of recent measures taken by commercial banks and central banks, they are more effective in reducing the debt cost of banks, alleviating the pressure of narrowing the net interest margin of some banks, and expanding the space for banks to further rationally benefit the real economy (promoting the stable and declining comprehensive financing cost of the real economy) and strengthening countercyclical adjustment." Zhou Maohua said that the central bank lowered the reverse repo rate, and the short-term capital cost of commercial banks’ integration with the central bank decreased, which helped to reduce the overall debt cost of banks and positively transmitted the loan cost to the real sector.
According to Wang Yunjin, a senior researcher at Zhixin Investment Research Institute, the central bank’s interest rate cut this time released a positive signal and eased the tension in the financial market. Since April, prices have been relatively stable, investment and consumer demand have recovered less than expected, and the pace of credit supply has slowed down. The market’s confidence in economic stabilization and recovery has declined, and financial market volatility has increased. At the same time, with the continuous downward trend of loan interest rate, the pressure of capital cost in the banking system has risen moderately, and lowering the reverse repo rate can moderately alleviate this pressure.
Be wary of short-term RMB depreciation pressure
After the announcement of the central bank’s interest rate cut, the financial market performed differently. Among them, treasury bond futures opened higher across the board and continued to rise. Wind data shows that as of the close of June 13, the 30-year main contract rose by 0.44%; The 10-year main contract rose by 0.27%; The 5-year main contract rose by 0.21%, and the 2-year main contract rose by 0.09%.
The RMB exchange rate fell in response. In the morning of June 13th, the onshore and offshore RMB exchange rates against the US dollar fell below the 7.16 and 7.17 marks respectively, both hitting new lows since November 2022. The exchange rate of offshore RMB against the US dollar once fell by more than 200 basis points, and the lowest intraday depreciation was 7.1781. The onshore RMB exchange rate against the US dollar depreciated to 7.1680.
After hitting the low point of the year, the onshore and offshore RMB exchange rates rebounded, but the whole day was still in a depreciation trend. As of 16: 00 on June 13th, the onshore RMB exchange rate against the US dollar was 7.1498, with an intraday depreciation rate of 0.1%. The exchange rate of offshore RMB against the US dollar was reported at 7.1601, and the intraday depreciation rate was 0.06%.
Beijing business today reporter noted that since May 2023, the exchange rate of RMB against the US dollar has entered a new round of depreciation channel, and the previous depreciation trend was also continued in June. The central parity of the RMB against the US dollar, the onshore and offshore RMB exchange rates against the US dollar have successively declined, and the depreciation low point has been continuously refreshed during the year.
Wang Yunjin pointed out that the recent continuous depreciation of the RMB against the US dollar and the relatively stable deviation of the US dollar index show that overseas countries are not optimistic about the expectation of domestic economic recovery. While the central bank released a positive signal by lowering the policy interest rate, it can push the market interest rate down further, speed up the recovery of demand, improve the market expectations of foreign investors on China’s economy, and help stabilize the RMB exchange rate.
Cheng Qiang, chief macroeconomic analyst of CITIC Securities, believes that it is necessary to be alert to the short-term pressure of RMB depreciation. The main factor behind this round of RMB exchange rate depreciation is the slowdown in the recovery of China’s economic fundamentals, and the secondary reason is the strength of the US dollar index caused by the expected ebb of US interest rate cuts. This interest rate cut may deepen the inversion of the spread between China and the United States, leading to the outflow of some foreign capital and increasing the pressure of RMB depreciation.
However, Cheng Qiang also stressed that in the medium term, there is limited room for RMB exchange rate depreciation, and the low point of 7.3 in 2023 is a strong resistance level, so the RMB may return to appreciation after China’s economic momentum is restored.
Zhou Maohua said that increasing the domestic central bank’s policy of stabilizing growth will help stabilize the market’s optimistic expectations for the prospects of economic recovery. The domestic financial environment remains moderately loose, and the stock market valuation is low, which is good for market risk appetite. At the same time, the economy is in the recovery stage, the low inflation environment, the increased care of the central bank, and the continued reasonable and abundant market liquidity will also be beneficial to the bond market.
LPR may be moderately lowered in June.
This interest rate cut is also the first time that the central bank has cut interest rates since 2023. Different from the previous simultaneous reduction of MLF and reverse repo rates, the central bank took the lead in lowering short-term interest rates separately. This also makes the market pay more attention to the upcoming June 15 and June 20, when the central bank will announce the new MLF sequel and LPR.
In recent months, the MLF operation scale of the central bank has maintained a small increase level. LPR, which takes MLF interest rate as the anchor interest rate benchmark, has also been inactive for nine consecutive months. Wang Yunjin said that compared with the previous cuts, the central bank did not choose to cut the policy interest rate together with MLF operation on June 15th, which may be a temporary adjustment based on the price and financial data in June, hoping to restore market confidence as soon as possible, speed up demand expansion and ease the pressure on banks.
As for the operation scale and interest rate of MLF in June, Wang Yunjin predicted that the MLF is expected to expire at 200 billion yuan on June 15, and the central bank will probably continue to work in excess of the same amount or slightly. At the same time, the MLF interest rate may be lowered by about 10 basis points accordingly, so as to promote the short-term and medium-and long-term interest rates to go down synchronously, so as to support commercial banks to slightly reduce LPR, continue to push down social financing costs, accelerate the pace of demand recovery, and stabilize economic growth expectations.
"If the demand recovery in the second half of the year is still less than expected, the central bank may consider a small RRR cut." Wang Yunjin added.
Zhou Maohua also said that from the historical experience, the spread between the 7-day reverse repo rate and the 1-year MLF rate is 75 basis points. The downward adjustment of the 7-day reverse repo rate means that the possibility of simultaneous downward adjustment of the subsequent MLF rate will increase. The possibility of a moderate reduction in LPR interest rates will also increase.
Zhou Maohua explained that at present, the domestic and foreign economies are in different cycles, the domestic inflation environment is low, the domestic policy focuses on me, and the macro policy focuses on promoting consumption and domestic demand recovery. At the same time, the resilience of foreign trade and the long-term allocation value of RMB assets are prominent, the flexibility of RMB exchange rate is significantly enhanced, the balance of payments is basically balanced, and the external environmental impact is limited.
"On this basis, it is still possible for the subsequent central bank to lower the RRR or targeted cuts to required reserve ratios and introduce structural tools, which will help release long-term and low-cost funds, further reduce the bank’s debt cost and enhance the bank’s credit expansion ability and enthusiasm." Zhou Maohua said. (beijing business today reporter Liao Meng)
Source: beijing business today.
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