Two consecutive days of "extremely low" reverse repurchase operations do not hinder ample liquidity; how to correctly interpret the central bank's liquidity signals

Ask AI · How does the central bank’s “ground volume” operation reflect the precision of monetary policy?

On April 2nd, the central bank conducted its second consecutive 500M yuan open market 7-day reverse repo operation, and also added in the announcement that “the needs of primary dealers were fully met,” with the policy rate (7-day reverse repo rate) remaining unchanged.

On the first trading day of April, the central bank’s “ground volume” operation attracted market attention: a 500M yuan 7-day reverse repo was conducted at a winning rate of 1.4%. Given that 78.5 billion yuan of reverse repos matured on that day, the central bank achieved a net withdrawal of 78 billion yuan.

The central bank’s “ground volume” operation reflects that market institutions’ demand for central bank funds has decreased. A reporter from Yicai learned from some financial institutions that at the end of March, the central bank increased liquidity injections to support cross-season funding, coupled with concentrated fiscal expenditures at the end of the quarter, keeping liquidity conditions loose in early April. For liquidity management reasons, most institutions did not report funding needs to the central bank in recent days. The wording in the announcement, “the needs of primary dealers were fully met,” also indicates that the central bank’s “ground volume” operation did not tighten liquidity, and the direction of moderately easing monetary policy has not changed.

From the perspective of liquidity conditions, the overnight interest rate in the money market has remained low. In the first two months of this year, the central bank injected about 2 trillion yuan of medium- and long-term funds through outright repos and medium-term lending facilities (MLF), creating favorable monetary and financial conditions for a good start to the economy this year. After the Spring Festival holiday, residents gradually deposited cash back into banks, maintaining a loose liquidity trend. The average daily value of the overnight rate DR001 in March was around 1.31%, continuing to decline from the lower levels of January and February. In early April, the overnight rate further fell below 1.3%, with financial institutions’ demand for borrowing funds significantly decreasing.

Market authoritative experts told reporters that there is no need to overly focus on the volume of central bank tool operations. On April 1st, the open market 7-day reverse repo only involved 20k yuan, with a net withdrawal of 78 billion yuan, yet liquidity remained ample. It is not appropriate to look at liquidity conditions by only focusing on the change in a single influencing factor; instead, various factors’ impacts on liquidity should be considered comprehensively in terms of volume. From this perspective, it is more appropriate to look at price changes, i.e., short-term interest rate levels, rather than just volume changes.

In fact, liquidity in the banking system is affected by changes in fiscal treasury funds, circulating cash, and other factors. The central bank maintains ample liquidity and needs to flexibly conduct various operations to hedge against these factors.

Industry experts stated that in January this year, Vice Governor Zou Lan explicitly clarified that the goal of open market operations is to guide the overnight rate to operate around the policy rate. The recent “ground volume” operations in the open market are precisely a reflection of the central bank’s more flexible and precise operations, and also an appropriate shift of monetary policy toward price-based regulation.

(This article is from Yicai)