PBoC Drains Liquidity But Cuts MLF & Reverse Repo Rates

In light of today’s 10bp rate cut to the interest rate applied to the PBoC’s 1-Year MLF facility (to 2.75%) it is worth highlighting that none of those surveyed by BBG were looking for a cut to the MLF rate today. The 7-day reverse repo rate has been cut alongside the move in the MLF, and by the same amount as the MLF (10bp to 2.00%).

• Today’s rate cut in both the 1-Year MLF and 7-day reverse repo rates against a net drain in medium-term liquidity reflects the policy problems that the PBoC faces at present, as it tries to balance the more than ample levels of liquidity in the banking system with a need to try and funnel lending through to the real economy, a tricky task for sure, with Friday’s much softer than expected credit data complicating matters further, probably forcing the PBoC’s hand when it came to today’s moves.
• In light of today’s moves we would suggest that next Monday’s 1-Year LPR fixing will likely set 5-10bp lower.