CHINA’S central bank is planning to move the date on which it injects one-year liquidity to domestic lenders to the 25th of each month, according to sources familiar with the matter, as part of a shift to relying primarily on a short-term interest rate to steer markets.
The change will take effect as early as in August, the sources said, asking not to be identified because they are not authorised to speak publicly. The People’s Bank of China (PBOC) now conducts its medium-term lending facility (MLF) operation on the 15th of every month.
The aim is to gradually de-link the MLF from the benchmark lending rates, known as the loan prime rates (LPRs) and published on the 20th of every month, according to the sources. The PBOC did not immediately reply to a faxed request for comment.
“If this materialises, it represents part of the ongoing overhaul of PBOC’s monetary policy,” Commerzbank economists including Charlie Lay wrote in a report on Thursday (Aug 1).
The PBOC in recent weeks began an overhaul of its policy framework, which could allow it to operate more such as global peers and influence market borrowing costs more effectively. It’s been downplaying the role of the MLF as a key rate while transitioning to using the seven-day reverse repurchase notes as the main policy lever to send out a clearer signal.
Some analysts had speculated about the change after the central bank disregarded the usual schedule last month by unexpectedly injecting funds via the MLF on the 25th. At the same time, the PBOC also lowered the MLF by 20 basis points after trimming the seven-day reverse repo rate by half that amount, a decision that followed an earlier cut of the LPRs by banks.
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“The future transmission of China’s monetary policy is likely to move from short-term seven-day rates to the LPR, rather than from the MLF to the LPR previously,” said Tommy Xie, head of Asia macro research at OCBC. The MLF could still used to manage liquidity and play a role in the central bank’s balance sheet, he added.
The LPRs are based on the interest rates that 20 banks offer their best customers. They are quoted as a spread over the central bank’s MLF rate, and the two had moved largely in lockstep in recent years.
If MLF operations take place on the 25th of each month, banks could find it harder to manage liquidity because funds already provided under the facility would still mature around the 15th, the PBOC-managed Financial News said in a report last week.
Banks have had little appetite for the MLF funds in recent months, as a decline in market rates meant it became cheaper for them to borrow from each other than from the PBOC.
The deeper cut of the MLF, compared with the seven-day rate, was likely to bring it closer to market borrowing costs, analysts said at the time.
In the meantime, the PBOC is planning to expand its toolkit by buying and selling government bonds, seeing it as a more effective and flexible way to manage liquidity in the economy. That could further diminish the PBOC’s need for the MLF, which injects money into the financial system via banks. BLOOMBERG
