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At about 9 o'clock in the morning today (8.15), the central bank suddenly and unexpectedly announced an interest rate cut. Carry out 204 billion yuan of open market reverse repurchase operations and 401 billion yuan of medium-term lending facility (MLF) operations. Among them, the 7-day reverse repurchase operation interest rate is 1.8%, down 10 basis points from last month (1.9%); the MLF operation interest rate is 2.5%, down 15 basis points from last month (2.65%). This comes after the central bank cut interest rates again in June.
The MLF due today is 400 billion, and the reverse repurchase is 6 billion. After calculation, 2040 + 4010 - 4000 - 60 = 199 billion net currency injection.
The article two days ago also mentioned that the social financing data in July, " Growth dropped sharply by 270.3 billion " (article on August 13, 2023), does indeed reflect the severity of the economic situation. Two days later, the central bank cut interest rates again to release liquidity, which was an unexpected and reasonable move.
Analysts also said: "The current stock of social financing is close to 366 trillion. The MLF interest rate cut has a significant effect on reducing the interest costs of the whole society. Increasing interest rate cuts is necessary in the medium and long term. The current credit of financial institutions The supply pressure is still higher than the effective demand of entities, and loan interest rates still have room to fall."
Don’t we all borrow money? Then lower the borrowing interest rate to reduce the pressure on you to repay the money and make you more willing to borrow money.
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Why is our central bank so concerned about social financing? This has something to do with the way we create money. Since our central bank does not have a money printing machine like the Federal Reserve, it can only rely on people to borrow money to let commercial banks print money. The specific method is that you take out the mortgage assets (such as a house) as collateral to the bank, and then the bank prints money and gives it to you as a loan. This is called "social financing".
Let’s give an example. You buy a house with a market price of 5 million. The down payment was 3 million, and a loan of 2 million was needed. You mortgage this house worth 5 million to the bank, and the bank will record "Zhang San's loan of 2 million" on the asset side of its balance sheet, and "developer's 2 million cash" on the liability side. This counts as the completion of the issuance of 2 million RMB.
The balance sheet of our central bank mainly consists of foreign exchange.
In other words, the source of credit for our central bank's base currency is still overseas strong credit entities - you can guess which ones they are. After all, looking at Fitch's ratings, we only have an A+ rating, while there are many established capitalist countries with international credit ratings higher than A+. The United States has been ranked AAA super credit all year round, and has just been downgraded to AA+ recently (see: Liu Jiaolian's 2023.8.3 article " Fitch takes action! The US credit rating has been downgraded again "). Above A+, there are four levels: AA-, AA, AA+, and AAA. Currently, only nine countries remain on Fitch's AAA credit rating list: Germany, Australia, Switzerland, Sweden, Luxembourg, Denmark, the Netherlands, Norway and Singapore.
The Fed is different. The main assets on its balance sheet are U.S. Treasuries and MBS, with U.S. Treasuries being the largest asset. In other words, the United States prints money with its right hand and spends it with its left hand. This is "money ability".
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The central bank and the Federal Reserve are currently in a retrograde cycle. The central bank is cutting interest rates, and the Federal Reserve is raising interest rates. On one side is the RMB with an interest rate of less than 2%, and on the other side is the USD with an interest rate of more than 5%. This also puts great pressure on the RMB to depreciate relative to the USD. Didn't you see, the RMB to USD exchange rate has already advanced to 7.28, which is only one step away from the key resistance line of 7.3.
On the one hand, the central government wants to cut interest rates to release liquidity to protect the economy, and on the other hand, it has to support the foreign exchange market to protect the exchange rate, which is really not easy.
The Federal Reserve wants to raise interest rates to combat the overheating economy and inflation, while at the same time supporting the capital market and protecting the stock market. It is also difficult to walk a tightrope.
The central bank may be suffering just like us, eagerly awaiting the day when the Fed's interest rate hike cycle ends and switches to a rate cut cycle.
As everyone knows, in July, the Federal Reserve resumed a 25bp interest rate hike (see: Liu Jiaolian's 2023.7.27 article " The Federal Reserve's Swan Song "). What's next? Will interest rates continue to be raised in September? When will interest rates be cut? In this regard, Chicago Mercantile Exchange (CME) data, Goldman Sachs, JPMorgan Chase and Morgan Stanley all have their own views.
CME data indicates that the current consensus among market traders is that the Federal Reserve may begin to cut interest rates in May next year (2024).
Goldman Sachs believes that the second quarter of 2024 is the time when the Federal Reserve may switch to interest rate cuts. It is expected that interest rates will be cut by 25bp each quarter, and the terminal interest rate will be stable at 3-3.25%.
JP Morgan Chase believes that it is not possible to see the Fed cut interest rates until the second half of 2024.
However, Morgan Stanley is very optimistic and believes that the Federal Reserve may cut interest rates in the first quarter of next year.
Most investors believe that at the next interest rate meeting on September 20, the Federal Reserve will announce a suspension of interest rate increases. Goldman Sachs believes that the Fed is likely to reach the final conclusion at its November interest rate meeting that core inflation has slowed and there is no need to continue raising interest rates.
* * * Original work by Liu Jiaolian * * *
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