The MLF operation kept the interest rate unchanged this month, which was consistent with our previous expectations. After the central bank cut interest rates last month and continued to do MLF in excess, the cost of capital will decrease in the near future, and the liquidity is more abundant than that at the end of 2021. In the past two weeks, the inter-bank certificate of deposit interest rate decreased by about 17bp compared with that before the interest rate cut, and the average dr007 in recent January was about 1.83%. After the reduction of MLF interest rate by 10bp in January, the new social finance and credit increased more than expected. The effect of reducing reserve requirements and interest rates since December 2021 has been reflected to some extent. In the case of strong social finance data, it is less necessary for the central bank to cut interest rates continuously this month. Meanwhile, the economic data of January and February 2022 have not been released, and the easing effect of monetary policy needs to be further observed.
The incremental continuation of MLF reflects the policy deployment of the central bank in coordination with fiscal coordination. This year’s monetary policy guidance has been clear. The economic work conference has put forward the requirement of “coordination and linkage between fiscal policy and monetary policy”. At the same time, the central bank has also talked about strengthening the monitoring and analysis of fiscal revenue and expenditure, government bond issuance, cash withdrawal and other factors in the fourth quarter of 2021 China’s monetary policy implementation report (implementation report), Comprehensive use of a variety of monetary policy tools to maintain reasonable and sufficient liquidity. In the context of fiscal policy, the scale of new special bonds of local governments exceeded 400 billion yuan in February, and the overall scale of special bonds in the first quarter exceeded the same period in 2020. By the end of the day, nearly 700 billion yuan of special bonds had been issued. It can be seen that the renewal of 300 billion MLF in excess this month is the best embodiment of monetary policy cooperating with fiscal force and maintaining the stability of the total amount of money and credit.
Considering the acceleration of the Fed’s interest rate hike and the central bank’s confidence in steady growth, it is more likely to cut interest rates in March.
First, the Fed’s monetary policy has accelerated and stepped up, the probability of tightening has increased, and the window period for the people’s Bank of China to cut interest rates has narrowed. As of February 14, 2022, the Federal Reserve’s expectation of raising interest rates by 50bp at the interest rate meeting in March has risen rapidly to 56%. Although most vote committees do not support the operation of raising interest rates by 50bp in March, it is basically a foregone conclusion that the Fed will raise interest rates from March. Looking back on 2015-2016, the monetary policies of China and the United States were divided. The Federal Reserve started the interest rate increase cycle at the end of 2015, while China is still in the easing cycle. In 2015, the central bank cut reserve requirements four times and interest rates five times to calm the downward pressure on the economy. However, after the US started the interest rate increase cycle, the central bank entered the observation period, and the monetary policy was generally stable. In order to maintain the overall stability of the RMB exchange rate and avoid large-scale flight of funds, and with reference to the operation mode of monetary policy from 2015 to 2016, we believe that the central bank will reduce the use of aggregate monetary policy and enhance the use of structural monetary policy after March. March will be a better window for interest rate reduction during the year.
Secondly, the total amount of credit increased significantly in January 2022, but there are still structural problems. In the future, the central bank still needs to strengthen easing and guide financial institutions to effectively expand credit. In January, the year-on-year growth rate of short-term loans and bill financing under new RMB loans was nearly 70%, while the year-on-year growth rate of medium and long-term loans of enterprises (Institutions) was less than 3%. Although the total amount of credit has recovered well, it has not stabilized structurally. In the monetary policy implementation report, the central bank mentioned four work objectives. Maintaining the stable growth of the total amount of money and credit and the steady optimization of the credit structure were placed in the top two. At the same time, the central bank also proposed to “continuously alleviate the three constraints of liquidity, capital and interest rate of bank credit supply” and “guide financial institutions to effectively expand credit supply and enhance the stability of total credit growth”. Therefore, we believe that the central bank is still possible to continue to cut interest rates.
Finally, from the perspective of the expected management of the central bank, March 15 is a good time to cut interest rates. The central bank immediately lowered the one-year MLF and Omo interest rates before the release of the fourth quarter data of 2021, which well reflected the policy’s determination to stabilize growth to the public. The market interest rate was adjusted immediately, and the policy effect at the price level was better. On March 15, the Bureau of statistics will release the economic data report card of February. At the same time, it is the day before the FOMC interest rate meeting. At that time, the two sessions will also come to an end, which is of great significance. Therefore, we believe that the interest rate cut will play a good role in stabilizing growth and expectations, and March will be a better time for the introduction of policies.
Risk tip: the spread of the epidemic exceeded expectations, and China’s foreign policies exceeded expectations
