China Securities Daily with an article today following the People’s Bank of China’s RRR cut yesterday:
Says the Bank may cut the Medium-term Lending Facility (MLF) rate during Q1.
Yesterday People’s Bank of China Governor Pan announced the Bank will cut RRR by 50bps from February 5th. RRR cuts are usually announced by the State Council, not the Governor of the Bank. He went on:
- PBoC will continue to use liquidity injection tools
- RRR levels are still relatively high
- cut will release CNY 1tln of extra available funds into the economy
- will cut re-lending and re-discount rates by 25bps for the rural sector and small firms from January 25th
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On that 1 tln release of funds, that’s if the demand for borrowing is forthcoming. With real rates so high in China loan demand has been relatively tepid.
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What is the MLF?
The PBOC’s MLF rate is a benchmark interest rate that banks in China can use to borrow funds from the People’s Bank of China for a period of 6 months to 1 year, as medium-term liquidity to commercial banks.
- The rate is typically announced on the 15th of each month.
- The interest rate on the MLF loans is typically higher than the benchmark lending rate (more on these below), which encourages banks to use the facility only when they face a shortage of funds.
- MLF loans are secured by collateral, which can be a wide range of assets including bonds, stocks, and other financial instruments. The collateral ensures that the PBOC can recover the funds if the borrower defaults on the loan.
The MLF rate sets the scene for the monthly Loan Prime Rate (LPR) setting on the 20th of each month.Current LPR rates are:
- 3.45% for the one year
- 4.20% for the five year
This month both MLF and LPR rates were left unchanged.
This article was written by Eamonn Sheridan at www.forexlive.com. Source