"Spicy Noodles" Released, Will Loan Interest Rates Decrease in the Future?#
Omnivore#
This article is from WeChat Official Account: Three-fold Life (ID: Ezhers), Author: Three-fold Life, Cover image from: Visual China
On February 18, 2024, the central bank announced that the 1-year MLF (Medium-term Lending Facility) and 7-day reverse repo rates were 2.5% and 1.8% respectively, unchanged from before!
These two rates are policy rates determined by the central bank.
What exactly are MLF and reverse repo? Today, let's review these two concepts.
MLF
MLF stands for Medium-term Lending Facility. According to pronunciation, MLF has a more down-to-earth name in the financial circle:
In fact, MLF is equivalent to loans issued by the central bank to commercial banks and policy banks, but certain requirements must be met to apply to the central bank.
When banks borrow from the central bank through MLF, they need to provide certain collateral.
The qualified collateral for MLF mainly includes government bonds, central bank bills, policy financial bonds, local government bonds, high-grade credit bonds, and small and micro, green, and agricultural financial bonds.
The loan term of MLF is usually 3 months, 6 months, or 1 year.
Because this term is longer than short-term terms such as 7 days, 14 days, and 28 days, MLF is called "medium-term" lending facility.
The central bank has requirements for the use of funds borrowed through MLF, guiding banks to increase support for key areas such as small and micro enterprises and agriculture.
When the MLF loan matures, it does not need to be repaid immediately. The bank can negotiate a new interest rate with the central bank to continue the operation.
Since it is a loan, interest must be paid. The MLF operation rate announced this time is 2.50%.
Let's summarize the process of MLF briefly.
Now let's take a look at another operation of the central bank.
Central Bank Reverse Repo
First, let's clarify a concept: primary dealers.
Primary dealers are a group of traders who have certain qualifications and can directly underwrite and bid for treasury bonds from the treasury bond issuing department.
Generally, they include banks and securities companies with strong financial strength.
Central bank reverse repo refers to the central bank buying securities from primary dealers to inject funds into the market and release liquidity, simply put, "putting money".
But this transaction does not end with the money being put out. The two parties will also agree to sell the securities back to the primary dealers on a specific future date and retrieve the funds.
After obtaining funds through central bank reverse repo, primary dealers will lend the funds to other small and medium-sized banks, providing liquidity to the market and easing short-term liquidity stress.
So in this process, central bank reverse repo is like the central bank "lending" money to primary dealers, and naturally, primary dealers need to pay "interest" to the central bank.
What is this interest rate? Currently, the 7-day central bank reverse repo rate is 1.80%.
Usually, the central bank can influence short-term market rates by adjusting the reverse repo rate.
Secondly, central bank reverse repo operations can also affect investor expectations and help stabilize the market.
So central bank reverse repo can be simply understood as:
If the central bank reverses the above process, it is called central bank repo.
At this time, the central bank sells securities to primary dealers and retrieves funds.
At the same time, the two parties will agree to buy back the securities on a specific future date.
In addition to the central bank, financial institutions and individual investors can also conduct reverse repo transactions in the interbank bond market and securities exchanges respectively.
Simply put, central bank repo is injecting money into the market and retrieving liquidity.
Central bank reverse repo is lending money to the market and releasing liquidity.
In summary, both MLF and central bank reverse repo are important policy tools of the central bank and have a significant impact.
This time, the central bank conducted 500 billion yuan of MLF operations and 105 billion yuan of reverse repo operations to maintain reasonable and sufficient liquidity in the banking system.
There is still room for future loan interest rate reductions.
This article is from WeChat Official Account: Three-fold Life (ID: Ezhers), Author: Three-fold Life