China’s c.bank reschedules its monthly liquidity injection

The People’s Bank of China (PBOC) is shifting the date of its one-year liquidity injections to domestic lenders from the 15th to the 25th of each month

This move, expected to take effect as early as August, marks a significant step towards prioritising short-term interest rates as the primary tool for steering markets.

The central bank’s aim is to gradually decouple the Medium-Term Lending Facility (MLF) from the Loan Prime Rate (LPR), the benchmark lending rate. By aligning the MLF operation date with the LPR release date, the PBOC hopes to enhance the effectiveness of its monetary policy transmission mechanism.

Recent actions, including an unexpected MLF injection on the 25th of this month and a steeper cut to the MLF rate compared to the seven-day reverse repurchase rate, indicate the PBOC’s growing reliance on short-term tools. This shift is in line with global central bank practices and aims to provide more flexibility in managing liquidity.

As the PBOC transitions to a more market-oriented approach, it is also considering expanding its toolkit to include government bond trading, further reducing its dependence on the MLF. This dual strategy is expected to refine the central bank’s ability to influence market conditions and support economic growth.

While the changes could pose liquidity management challenges for banks in the short term, they are anticipated to contribute to a more efficient and responsive monetary policy framework over time.

Attribution: Bloomberg