MLF rate no longer carries policy intention, say sources

The interest rate of the medium-term lending facility (MLF) operations — a central bank tool to manage liquidity — is no longer indicative of policy intentions, as policymakers gradually shift to new liquidity tools, marking an evolution of China's monetary policy framework, reliable sources and experts said.

They added that the central bank has already conducted government bond transactions and outright reverse repos this month, the total volume of which will significantly exceed the amount of maturing MLF, keeping liquidity ample.

On Wednesday, the People's Bank of China, the country's central bank, issued 300 billion yuan ($41.1 billion) worth of one-year MLF loans to financial institutions, with a winning bid interest rate of 2 percent, unchanged from the previous month.

Since the second half of the year, the MLF has shifted to a market-based bidding system, with participating financial institutions increasingly using the rate of one-year negotiable certificates of deposit as a reference for their bids. As a result, the MLF winning rate is no longer an indication of policy intentions, said sources and experts close to the central bank.

Wednesday's move came in contrast with the 1.45 trillion yuan of MLF maturities this month, resulting in a net cash withdrawal of 1.15 trillion yuan and indicating that other policy tools would be taken to maintain liquidity ample.

"We believe that the central bank will continue to conduct large-scale outright reverse repos to replace MLF operations," said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

"Going forward, MLF will likely be rolled over in smaller amounts, leading to a continued decline in the outstanding MLF balance, further diminishing the policy significance of MLF rates," Wang said.

Looking ahead, Ming Ming, chief economist at CITIC Securities, said that a near-term cut in the reserve requirement ratio remains relatively certain given an anticipated seasonal rise in cash demand as Spring Festival approaches and policymakers' plans to issue larger-scale government bonds.

In previous years, the PBOC provided liquidity at year-end primarily through increased MLF operations. This year, the central bank has relied more on outright reverse repos and seven-day reverse repos, which have shorter maturities and lower interest rates.

This approach, analysts said, not only meets banks' year-end liquidity needs but also reduces their funding costs, helping to stabilize their net interest margins and thus facilitating the transmission of lower costs to the real economy.