Wang Yongli: Central Bank Policy Rate and Market Benchmark Rate

What the central bank directly adjusts is the policy interest rate (such as the interest rate of MLF), which indirectly affects rather than directly determines the market interest rate (such as LPR). It should be avoided to describe the increase or decrease of LPR as "the central bank raises or lowers the benchmark lending rate", or simply refers to the central bank raising or lowering interest rates.

Whenever the " Medium-term Lending Facility " (Medium-term Lending Facility, referred to as MLF) interest rate or " Market Quoted Rate " (Loan Prime Rate, referred to as LPR, English literal translation is "loan benchmark interest rate"), it is often generalized It is said that the central bank is raising or lowering interest rates. For example, many media or experts said: "On January 17, 2022, the central bank will lower the one-year MLF interest rate by 10 basis points from 2.95% since April 2020 to 2.85%"; "On January 20, 2022 On the 1st, the central bank lowered the LPR interest rate , reducing the one-year LPR by 10bp to 3.7%, and the five-year LPR by 5bp to 4.6%"; after the MLF interest rate and LPR remained unchanged in March and April 2022, "the central bank In May, the MLF interest rate and the one-year LPR continued to remain unchanged, but the LPR over five years was lowered from 4.60% to 4.45%, followed by the statement that "the central bank has finally cut interest rates".

It is inaccurate to describe the adjustment of MLF and LPR interest rates as the central bank’s adjustment of the benchmark interest rate, ignoring the difference between the central bank’s policy interest rate and the market’s benchmark interest rate. Although closely related, the two are managed differently.

The central bank's policy interest rate refers to the benchmark interest rate of bank deposits and loans directly determined by the central bank in order to reflect the orientation and adjustment of monetary policy, or to achieve the policy interest rate target through the scale of the central bank's investment or withdrawal of liquidity for financial institutions, which further affects financial institutions. The interest rate tools and interest rate levels used for interbank lending and deposit and lending interest rate changes.

There are many policy tools used by the central bank to regulate the liquidity of financial institutions, including raising or lowering the statutory deposit reserve ratio, freezing or releasing long-term funds (liquidity) of depository institutions accordingly, and indirectly affecting market interest rates; Or repay the central bank bills, and correspondingly shrink or increase the liquidity of the buyer, which will affect the market interest rate to a certain extent; the central bank adjusts the liquidity and capital cost of loan lending institutions through targeted re-lending scale or interest rate adjustment (structural monetary policy tools) ; Liquidity is placed or withdrawn through open market operations such as overnight or short-term borrowing or repurchase; medium-term liquidity is placed or withdrawn through medium-term lending facilities (MLF), etc. However , what can be used as a representative central bank's policy interest rate tool must be an operational tool that the central bank can control and has general market influence and representativeness. If the counterparty of the transaction is not wide, the scale is not large, and the frequency is not high, it cannot become the main central bank policy interest rate tool. Therefore, in recent years, the central bank has gradually clarified: the open market operation rate is the short-term policy rate, the medium-term lending facility rate is the medium-term policy rate, and the 7-day repurchase rate (DR007) of depository institutions in the inter-bank market is the short-term interest rate regulation target. This indirectly affects the market interest rate levels of interbank lending, deposits and loans of financial institutions.

Among them, the medium-term lending facility (MLF) is currently the most important central bank policy interest rate tool . In September 2014, the People's Bank of China created medium-term lending facilities (originally including 3-month, 6-month, and 1-year maturity grades, but in the end it was basically concentrated on 1-year maturity), which is the central bank's medium-term lending facility. Monetary policy tools for liquidity adjustment are targeted at commercial banks and policy banks that meet the requirements of macro-prudential management, and can be carried out through bidding, usually on the 15th of each month (postponed in case of holidays). The medium-term lending facility is issued in the form of pledge, and financial institutions provide high-quality bonds such as treasury bonds, central bank bills, policy financial bonds, and high-grade credit bonds as qualified pledges. The interest rate of the medium-term lending facility plays the role of the medium-term policy interest rate . By adjusting the scale and cost of medium-term financing to financial institutions, it has an impact on the balance sheet of financial institutions and interest rate market expectations. This has become the most policy interest rate-oriented policy tool.

After the central bank determines the policy interest rate, it should not directly determine the actual market interest rate level of interbank lending or deposits and loans of financial institutions, but should support the market-oriented development of interest rates. However, the market-oriented development of interest rates still requires the formation of a market benchmark interest rate for reference by various financial institutions.

For example, in the international financial market, the London Interbank Offered Rate (LIBOR) was once the most widely used monetary benchmark interest rate. However, due to the outbreak of multiple quotation manipulation cases during the international financial crisis in 2008, which seriously weakened the market credibility of LIBOR, the UK Financial Conduct Authority (FCA) announced in 2017 that it would no longer require quotation banks to report LIBOR after the end of 2021. That is to say, LIBOR will withdraw from the market by the end of 2021. For this reason, the international community is actively exploring the establishment of a new market benchmark interest rate.

In China, after years of continuous cultivation, important progress has been made in the construction of the benchmark interest rate system. The money market, bond market, and credit market have basically cultivated their own index interest rates. Bond repurchase rates (DR, especially DR007), treasury bond yields, and loan quote rates (LPR) among depository financial institutions have all played an important role as benchmark interest rates in the corresponding financial markets.

Among them, LPR has become the benchmark interest rate for loan pricing of financial institutions , and it already has relatively strong credibility, authority and market recognition in China.

LPR first started in 2014. On August 17, 2019, the People's Bank of China issued an announcement deciding to reform and improve the LPR formation mechanism. After the reform, 18 quoting banks (the quoting banks are evaluated and dynamically adjusted by the People's Bank of China) will target the best quality customer loans, and quote according to the open market operation interest rate (mainly the MLF interest rate) plus points ( How many points to add is not decided by the central bank). At present, LPR includes two varieties with a term of 1 year and a term of more than 5 years. Before 9:00 on the 20th of each month (postponed in case of holidays), each quotation bank submits quotations to the National Interbank Trading Center with a step of 0.05 percentage points. , the trading center calculates the LPR after removing the highest and lowest quotations, and calculates the LPR by rounding to the nearest integer multiple of 0.05%. In order to strengthen the management of market expectations and promote a better connection between the LPR release time and the financial market operating time, the LPR release time will be adjusted from 9:30 am to 9:15 am from January 20, 2022. The central bank requires financial institutions to use this as the benchmark interest rate for loan pricing, and other loan interest rates can be generated on this basis and adjusted by themselves.

It can be seen that the LPR is not directly determined by the central bank, but is independently determined by the quoting bank according to the interest rate level of MLF; although the central bank adjusts the interest rate of MLF can have an impact on LPR, the interest rate difference between LPR and MLF (plus points) does not It is not fixed, but will change with the change of loan risk (so, the central bank named LPR as "market quotation rate" instead of "loan benchmark rate", perhaps to prevent people from understanding it as "central bank policy Interest rate”); LPRis only the market benchmark interest rate for credit loans of banks to the best customers. The lowering of LPR does not mean that the loan interest rate of all customers will be lowered in the same proportion. The loan interest rate of high-risk customers may even rise instead of falling; LPR does not The reduction does not mean that the interest rates of other loans cannot be lowered, and even the interest rates of special loans with sufficient collateral (such as personal first-home mortgage loans) may be lower than LPR with the same term.

On the basis of continuously improving the lending rates of financial institutions, interbank lending rates, and national bond yield benchmarks, the pace of marketization of bank deposit interest rates is also conditionally accelerated accordingly.

To sum up, in the case of promoting the marketization of interest rates, it is also necessary to clarify the difference between the "central bank policy interest rate" and the "market base interest rate". What the central bank directly adjusts is the policy interest rate (such as the interest rate of MLF), which indirectly affects rather than directly determines the market interest rate (such as LPR). It should be avoided to describe the increase or decrease of LPR as "the central bank raises or lowers the benchmark lending rate", or simply refers to the central bank raising or lowering interest rates.