On September 27th, the People’s Bank of China simultaneously implemented the RRR cut and interest rate cut-monetary policy made efforts to support steady growth and strengthen confidence.

On September 27th, the People’s Bank of China issued an announcement on the open market business, which lowered the operating interest rate of 7-day reverse repurchase in the open market by 0.2 percentage points, from the previous 1.7% to 1.5%. At the same time, the central bank decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points from September 27, 2024 (excluding financial institutions that have implemented the 5% deposit reserve ratio). After this reduction, the weighted average deposit reserve ratio of financial institutions is about 6.6%.

The insiders believe that this is the implementation of Politburo meeting of the Chinese Communist Party’s requirements. Politburo meeting of the Chinese Communist Party, who was held on September 26th, stressed the need to intensify the counter-cyclical adjustment of fiscal and monetary policies. It is necessary to reduce the deposit reserve ratio and implement a vigorous interest rate cut. On September 27th, the central bank simultaneously implemented the RRR cut and interest rate cut, which fully reflected the determination to increase the intensity of monetary policy regulation and control and strive to achieve the annual economic and social development goals with practical actions.

It is worth noting that this policy interest rate reduction is the largest in the past four years, which is an important embodiment of supportive monetary policy and will reduce the comprehensive financing cost of society through transmission. Dong Ximiao, chief researcher of Zhaolian, said that the policy interest rate was lowered by 20 basis points, which reflected the requirement of "strength". Under the market-oriented interest rate regulation mechanism, the benchmark interest rates in various markets will be lowered.

Earlier, Pan Gongsheng, governor of the central bank, announced at the press conference of the State Council Office held on September 24th that he would cut interest rates in the near future, and the winning bid rate for the medium-term lending facility (MLF) operation launched on September 25th dropped by 30 basis points. Market analysts predict that this policy interest rate cut will also guide the deposit interest rate and the loan market quotation rate (LPR) to go down simultaneously, and keep the net interest margin of commercial banks stable. At the same time, interest rate cuts will promote the reduction of comprehensive financing costs of the real economy and support stable economic growth.

Wang Qing, chief macro analyst of Oriental Jincheng, believes that lowering the financing cost will directly stimulate consumption and investment demand, which will help solve the problem of insufficient effective demand and promote the improvement of economic growth momentum. At the same time, it will push the price level to rise moderately and the income of residents will grow faster. In addition, the central bank cut interest rates significantly, releasing a clear signal of steady growth, which will effectively boost market confidence and improve social expectations.

The sharp interest rate cut by the central bank will continue to boost market confidence. With the support of a series of recent incremental policies, the market expectation has obviously improved, the A-share market has been rising for several days in a row, and the Shanghai Composite Index has continuously broken through the 2,800, 2,900 and 3,000 points, with a significant volume of transactions. Pang Yao, chief economist of Jones Lang LaSalle Greater China, said that in this context, the central bank announced a rate cut on September 27, which is conducive to maintaining the continuity of policy intensity, further condensing the consensus of high-quality development, and consolidating the capital market’s sustained and stable foundation, providing sufficient impetus for the healthy and upward development of the market.

This time, the central bank once again announced the interest rate cut by adjusting the 7-day reverse repurchase operating rate in the open market, which further confirmed the reform direction of the central bank to improve the market-oriented interest rate regulation mechanism.

Pan Gongsheng mentioned at the Lujiazui Forum 2024 held on June 19th that the 7-day reverse repurchase operating interest rate has basically assumed the function of the main policy interest rate. Zou Lan, Director of the Department of Goods Administration of the Central Bank, said at the press conference of the State Council Office on September 5 that the central bank has made it clear that the operating interest rate of the 7-day reverse repurchase is the main policy interest rate, and has changed the bidding of the 7-day reverse repurchase from the original interest rate to the fixed interest rate and quantity bidding, which fully meets the bidding needs of the primary dealers. The interest rate is no longer the result of winning the bid, but is determined by the central bank according to the needs of implementing monetary policy, and the quantity is no longer a means for the central bank to adjust liquidity, but is jointly determined by the primary dealers according to the policy interest rate and their market judgment.

In addition, the operating interest rates of other open market repo varieties will be adjusted synchronously according to the rules. In the announcement of the central bank on September 27th, it was mentioned that "the operating rates of 14-day reverse repurchase and temporary forward and reverse repurchase will continue to be determined by adding and subtracting points on the operating rate of 7-day reverse repurchase, and the range of adding and subtracting points will remain unchanged". According to this rule, the 14-day reverse repurchase operating interest rate will be lowered to 1.65%; The operating rates of temporary forward and reverse repurchase will be adjusted to 1.3% and 2.0% respectively.

Since the beginning of this year, the central bank has adhered to a supportive monetary policy stance, increased the intensity and accuracy of monetary policy regulation, and created a good monetary and financial environment for China’s stable economic growth and high-quality development.

"After this RRR cut, there is still room for further easing of monetary policy." Wang Qing believes that in terms of quantitative monetary policy, after the RRR cut, the weighted average deposit reserve ratio of commercial banks is about 6.6%. Considering that the financial institutions that have implemented the 5% deposit reserve ratio before have not implemented the RRR reduction, this means that the lower limit of the current deposit reserve ratio is 5%, that is, there is still room for the RRR reduction. In addition, even if the weighted deposit reserve ratio is reduced to 5%, the central bank can inject liquidity into the financial market through MLF and buying government bonds.