Sep 17, 2019 08:29 PM

Central Bank Bucks Expectation of Key Interest Rate Cut

The headquarters of the People's Bank of China in Beijing in October 2018. Photo: IC Photo
The headquarters of the People's Bank of China in Beijing in October 2018. Photo: IC Photo

Bucking market expectations of a cut to a key interest rate, the central bank announced on Tuesday that its latest injection of cash into the financial system through the one-year medium-term lending facility (MLF) would be offered at the same rate as its previous batch.

The MLF — a policy lending tool that the People’s Bank of China (PBOC) uses to manage liquidity — has taken on added significance since the central bank’s recent reform to how loans are priced. The revamped national loan prime rates (LPRs), which banks use as a reference point, are based on the MLF rate. This is the second tranche of MLF lending since the reform came into effect on Aug. 20.

The PBOC announced (link in Chinese) on Tuesday it would lend 200 billion yuan ($28.3 billion) through the MLF at a 3.3% interest rate, which would be unchanged from the previous MLF injection on Aug. 26. However, as a total of 345 billion yuan of central bank lending came due on Tuesday — 265 billion yuan worth of one-year MLF loans and 80 billion worth of seven-day reverse repos — the central bank withdrew a total 145 billion yuan of liquidity from the financial market.

Stock investors reacted coolly, with the benchmark Shanghai Composite Index closing down 1.74% Tuesday.

Market observers had predicted an MLF rate cut, as major economies have generally been adopting looser monetary policy and because it would meet the government’s goal of lowering borrowing costs, especially for private firms, amid downward economic pressure.

The one-year national LPR is set by averaging quotations submitted by 18 commercial banks after discarding the lowest and the highest quotes. The banks decide these quotations by adding multiples of five basis points to the one-year MLF rate. This arrangement is intended to allow the market to play a greater role in pricing loans than the previous system, which was centered on the PBOC’s benchmark lending rates, but leaves the central bank with a way to still influence borrowing costs.

Economists from Lianxun Securities Co. Ltd. said that the PBOC may have kept the MLF rate unchanged to avoid liquidity becoming too loose in the wake of its 50-basis-point cut to commercial banks’ reserve requirement ratios (RRRs) on Monday. A basis point is one-hundredth of a percentage point. The RRR cut — which slashed the amount of cash banks must keep in reserve — released around 800 billion yuan for long-term lending.

Zhang Xu, an analyst at Everbright Securities Co. Ltd., said that the PBOC using the MLF rate to influence bank lending rates so soon after the reform would go against the spirit of the change, which is intended to be market-oriented.

Liu Xiaoshu, chief economist of Bank of Qingdao Co. Ltd., said that banks can try to shorten the gap between their LPR quotations and the MLF rate. The first revamped one-year national LPR released last month came in at 4.25%, 0.95 percentage points higher than the one-year MLF rate.

The next set of national LPRs, based on this month’s MLF rate, will be released on Friday. Analysts are predicting that the rates will probably fall five to 10 basis points from last month.

The PBOC said earlier this month that the RRR cut on Monday and the two more targeted cuts scheduled for the next two months can unleash a total of around 900 billion yuan for long-term lending. The cuts can reduce banks’ funding costs by an estimated 15 billion yuan a year, which can help lower actual interest rates on loans to businesses, it said.

Zhu Chaoping, global market strategist at J.P. Morgan Asset Management, said it is still possible to see a MLF rate cut or more RRR cuts in the near future, if the financing costs for the private sector and small and midsize enterprises remain “substantially above” the national LPRs.

Liu said that China should also pay attention to the accessibility of loans in addition to guiding lending rates down.

An earlier version of this story misquoted Liu Xiaoshu, chief economist of Bank of Qingdao. Liu said that banks can try to shorten the gap between their LPR quotations and the MLF rate.

Contact reporter Guo Yingzhe (

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