The central bank unexpectedly "added an extra session" to conduct a 200 billion yuan Medium-Term Lending Facility (MLF) operation, while also lowering the interest rate by 20 basis points.

On Thursday, the central bank announced that on July 25, 2024, the People's Bank of China conducted a 200 billion yuan MLF operation through an interest rate bidding method, with a winning bid interest rate of 2.3%, a decrease of 20 basis points from before.

At the same time, the central bank stated that in order to maintain a reasonable and sufficient liquidity in the banking system at the end of the month, it carried out a reverse repurchase operation of 235.1 billion yuan with a fixed interest rate and quantity bidding method, with the interest rate remaining stable at 1.7%. Considering that there was a maturity of 49 billion yuan on the same day, the net withdrawal of reverse repurchase was 186.1 billion yuan.

It is worth mentioning that the central bank usually carries out an MLF operation once a month in the middle of the month. On the 15th of this month, the central bank conducted a 100 billion yuan MLF operation at an interest rate of 2.5%. After two MLF operations this month, the net injection of MLF this month was 197 billion yuan, ending the trend of no net injection for four consecutive months.

Industry insiders said that the additional MLF operation this time sent a signal of easing, meeting the medium and long-term funding needs of financial institutions. In addition, the MLF operation this time was arranged after the LPR quotation of this month, which also reflected the intention to downplay the policy color of MLF interest rates, and the interest rate bidding method also highlighted the importance of price-based monetary policy.

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The signal of easing was released to meet the medium and long-term funding needs of institutions.

Analysis pointed out that the MLF operation was carried out without any recent maturities, sending a signal of easing.

People close to the central bank said that the additional MLF operation this time met the medium and long-term funding needs of financial institutions. The decrease in the MLF interest rate this time is greater than the decrease in the interest rate of the 7-day open market reverse repurchase operation, which was reduced by 10 basis points earlier this week.

The MLF operation this time is close to the end of the month, and the liquidity demand of financial institutions has increased significantly, and there is a certain upward pressure on the money market interest rate. Some traders from MLF participating institutions also mentioned that they have considered the maturity of next month in this demand report, and even considered the central bank's possible sale of government bonds. The central bank's MLF operation this time has a net injection of 200 billion yuan, which has better met the liquidity needs of financial institutions.

Experts pointed out that during the transition period of adjusting the timing of MLF operations, experts pointed out that financial institutions need to pay more attention to the liquidity situation in the middle of the month. If the MLF is postponed to the 25th of each month in the future, due to the maturity of the existing MLF around the middle of the month, plus other factors such as the tax period in the middle of the month, financial institutions will face new tests in liquidity management.Diminishing Policy Connotations of MLF Interest Rates

Experts have indicated that the scheduling of this Medium-term Lending Facility (MLF) operation after the monthly Loan Prime Rate (LPR) quotation this month also reflects the intention to diminish the policy connotations of MLF interest rates.

Analysts have noted that the central bank's decision to conduct an additional MLF operation on July 25th was both unexpected and reasonable. Previously, the central bank governor Pan Gongsheng stated at the Lujiazui Forum that he intended to diminish the policy interest rate connotations of tools other than the 7-day reverse repo operation. In July, without any adjustment to the MLF interest rate on the 15th, the LPR followed the 7-day reverse repo rate to decrease by the same margin on July 22nd, indicating that the LPR is increasingly referencing short-term policy interest rates. The scheduling of this MLF operation after the LPR quotation further diminishes the policy interest rate connotations of the MLF, suggesting that changes in the winning interest rate do not carry policy signaling implications.

Moreover, this MLF operation explicitly employed an interest rate tender method, meaning that participating institutions could choose multiple interest rates when bidding, and the final winning results more accurately reflect the supply and demand conditions of funds and market interest rate situations. In practical terms, the moderate decline in this MLF interest rate has effectively bridged the gap with market interest rates such as interbank certificates of deposit.

Furthermore, this MLF operation clearly utilized an interest rate tender approach, allowing participating institutions to select multiple interest rates during the bidding process. The final winning results are more reflective of the balance between the supply and demand for funds and the prevailing market interest rates. From the practical outcomes, the moderate decrease in this MLF interest rate has effectively narrowed the disparity with other market interest rates, such as those of interbank certificates of deposit.