It is unlikely that interest rates will rise significantly unilaterally

China News Service, Beijing, February 9 (Xia Bin) On the 9th, the People's Bank of China stated that it would not conduct open market reverse repurchase operations for the time being. As a result, the central bank has suspended open market reverse repurchase operations for five consecutive days, and the official explanation is: the current total liquidity in the banking system is at a relatively high level.

Previously, the reverse repo winning rate, SLF (Standing Lending Facility), and MLF (Medium-term Lending Facility) all increased. In addition, the central bank has "not given money" for five consecutive days. The market believes that the central bank's monetary policy has changed, the signal of interest rate hikes is clear, market liquidity is facing a test, and the days of "money tightness" are coming.

"The liquidity pressure after the Spring Festival itself is not as big as before the Spring Festival. It is normal for the central bank to suspend further (reverse repurchase) operations." Wen Bin, chief researcher of China Minsheng Bank, pointed out that the central bank uses a number of tools and means to ensure the concentrated demand for cash injection before the Spring Festival, and even considers liquidity expectations after the holiday.

Data show that as of the 9th, the central bank has withdrawn a net 545 billion yuan (RMB, the same below) in the past four days, and it has released 630 billion yuan of liquidity for the market by carrying out TLF (temporary liquidity facility) operations before the Spring Festival.

Wen Bin believes that the current suspension of open market operations by the central bank does not mean that it will become a trend. In the short term, as the decline in foreign exchange reserves has narrowed in January, the negative growth in foreign exchange holdings may be alleviated in the future. Therefore, the pressure on the central bank's base currency injection will be alleviated.

So, can the recent (February 3) increase in the winning bid rate for the central bank's open market reverse repurchase operation be regarded as a signal for an interest rate increase?

Xu Zhong, director of the Research Bureau of the People's Bank of China, previously told a reporter from China News Service that the rise in the reverse repurchase rate was the result of market-based bidding, not an interest rate increase by the central bank.

"Traditionally speaking, the central bank's interest rate hike refers to the increase in the benchmark interest rate for deposits and loans, with strong intention of active regulation, while the increase in the winning rate of open market operations is a manifestation of the market trend under the influence of capital supply and demand, which is mainly determined by the market. Some market participants see the difference between the two and believe that it is not the central bank raising interest rates." Xu Zhong said.

Zhu Jianfang, chief economist of CITIC Securities, believes that the central bank intends to control asset bubbles and deleverage due to the rise in interest rates on various funds. Economic fundamentals and inflation factors do not support the central bank's logic of raising interest rates. Since the end of 2014, the "low interest rates and wide liquidity" financial environment created by continuous interest rate cuts and reserve requirement ratios has easily fostered real estate and bond market bubbles, as well as higher financial market leverage ratios.

Where will interest rates go in the future? Li Huiyong, Chief Macroeconomic Analyst of Shenwan HongyuanSaid, "It seems unlikely that money market interest rates will rise significantly unilaterally. The most likely scenario is bilateral fluctuations and increased flexibility."

He told reporters that from the perspective of the next 3 to 6 months, there is no need to worry too much about rising interest rates. If the pressure on China's capital outflows is further reduced in the future, the economy faces adjustment pressure again, and the phased deleveraging goal is basically achieved, it will be possible to suppress the rise in interest rates or even push interest rates down.

Li Xunlei, chief economist of Zhongtai Securities, mentioned that overall, the current monetary policy is only adjusted from loose to neutral, and the exchange rate will not be a reason for monetary tightening. Therefore, there is no need to regard the central bank’s previous increase in funding interest rates as the beginning of monetary tightening policy. “This year is likely to be tightening first and then loosening.” (End)