The PBoC may reduce the amount of medium-term liquidity in the banking system during next Monday’s MLF operation, as the continued presence of loose funding conditions in the interbank market has resulted in increased leverage and arbitrage plays, the 21st Century Business Herald reported, citing analysts. In the first week of August, the DR001 rate fell to around 1%, while the DR007 rate fell below 1.3%, with both measures reaching the lowest level observed in 2022, operating clearly below the 7-day reverse repo rate of 2.1%. The substantial deviation of market interest rates from policy rates will weaken the guiding role of policy rates and hinder monetary policy transmission, with the newspaper noting that the central bank is likely to intervene moderately if the DR001 rate falls below 1%, citing Ming Ming, chief economist at CITIC Securities.
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