Lowering reserve requirements and interest rates has room to help create a favorable monetary and financial environment

On the 8th, China Securities Journal published an article titled "There is room for reserve requirement and interest rate cuts to help create a favorable monetary and financial environment.". The article states that there has been a heated discussion in the market regarding reserve requirement and interest rate cuts recently. Experts said that in the context of the accelerated issuance of government bonds and the issuance of ultra long term special treasury bond, the reduction of reserve ratio can better provide medium and long-term liquidity, and the interest rate cut at the right time can further reduce the financing costs of the real economy, helping to create a good monetary and financial environment.

Expected increase in reserve requirement reduction

Experts believe that in the context of the accelerated issuance of government bonds and the issuance of ultra long term special treasury bond, the demand for medium and long-term liquidity will increase accordingly. The implementation of RRR reduction at this stage can create a suitable liquidity environment.

From a time perspective, the probability of a reserve requirement reduction in the second quarter is relatively high. Industry insiders believe that the fiscal policy will be significantly strengthened in the second quarter, and government bonds, especially ultra long term special treasury bond, should be issued as soon as possible. In order to avoid short-term liquidity tension and excessive interest rate volatility, the probability of the central bank reducing reserve ratio to release long-term low-cost funds to banks will increase.

Zhang Jun, Chief Economist and Dean of the Research Institute of China Galaxy, believes that promoting economic growth requires the coordinated efforts of monetary and fiscal policies. In the second quarter, the issuance of government bonds and policy bank bonds is likely to accelerate. In the third quarter, there may be a peak in issuance, and it is possible to consider reducing reserve requirements, providing liquidity, and coordinating fiscal policies to smooth out fund fluctuations.

Since the beginning of this year, the central bank has repeatedly sent signals to the market that there is still room for reserve requirement reduction. Industry insiders believe that this indicates that reducing reserve requirements is only a matter of timing, and the specific timing depends on the effectiveness of the policy, economic recovery, and achievement of goals.

Interest rate cuts or timing of implementation

In order to further reduce the financing costs of the real economy, in addition to lowering reserve requirements, interest rate cuts are also expected to be introduced at an appropriate time.

Dong Ximiao, Chief Researcher of China Merchants Bank, stated that the central bank will continue to lower policy interest rates such as the Medium Term Lending Facility (MLF) rate, guide banks to lower deposit rates, promote an orderly decline in the Loan Market Quotation Rate (LPR), and further reduce the financing costs of the real economy. "Whether it's policy interest rates or market interest rates, deposit interest rates or loan interest rates, there is room and possibility for a decline," he said.

Overall, interest rate cuts meet certain conditions. On the one hand, the constraints of price factors on monetary policy have weakened. Wang Qing, Chief Macro Analyst of Oriental Jincheng, stated that currently and in the future, prices will remain in a low operating state. "However, the actual loan interest rates for enterprises and residents are relatively high. Therefore, to reduce the financing costs of the real economy, it is necessary to guide the nominal loan interest rate downward by lowering policy interest rates to alleviate the pressure of high real interest rates," said Wang Qing.

On the other hand, MLF interest rates may be lowered. Wang Qing further stated that this will guide the LPR of the two maturity varieties to follow up and adjust, driving the continuous decline of loan interest rates for enterprises and residents. The decrease in LPR will drive down loan interest rates, providing more favorable conditions for resolving local debt risks this year.

Structural tools play a directional guiding role

In addition to using aggregate policy tools, structural monetary policy tools will continue to exert targeted guidance.

The focus of monetary policy will continue to be on precision and effectiveness. "The expected implementation of structural monetary policy tools to support equipment updates and reduce financing costs for new energy industries such as manufacturing remains a priority consideration," said Tao Chuan, Chief Macro Analyst at Dongwu Securities.

Yue Kai Securities Chief Economist Luo Zhiheng stated that the role of structural monetary policy tools should be fully utilized, and support for major strategies, key areas, and weak links should be increased. Make good use of the newly established 500 billion yuan loan for technological innovation and technological transformation, and support the digital, intelligent, and high-end upgrading and transformation of small and medium-sized technology enterprises and key areas. Fully leverage the role of refinancing and rediscounting, guide financial institutions to increase their lending to private and small and medium-sized enterprises, and reduce financing costs.

In Dong Ximiao's view, the central bank will strengthen "precise drip irrigation" in its structure, further stabilize the confidence and expectations of operating entities, and provide greater support to financial institutions to do well in five major articles, creating a more suitable monetary and financial environment for macroeconomic recovery and high-quality development.