"Central Bank Cuts Reserve Requirement, Interest Rates with Largest Reduction in Four Years"

On September 27th at 8 a.m., the central bank announced that starting from September 27th, 2024, the reserve requirement ratio for financial institutions would be reduced by 0.5 percentage points (excluding financial institutions that have already implemented a 5% reserve requirement ratio). After this adjustment, the weighted average reserve requirement ratio for financial institutions is expected to be approximately 6.6%.

Simultaneously, the central bank's official website issued a public market operation announcement, reducing the 7-day reverse repo operation interest rate by 0.2 percentage points, from the previous 1.70% to 1.50%.

Following the Central Political Bureau meeting on the 26th, which stated "to lower the reserve requirement ratio and implement a substantial interest rate cut," the central bank's synchronized implementation of reserve requirement ratio reduction and interest rate cut fully reflects the determination to intensify monetary policy regulation and strive to achieve the annual economic and social development goals through practical actions.

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The amplitude of this adjustment is the largest in nearly four years and is an important manifestation of supportive monetary policy, which will reduce the comprehensive financing costs in society through transmission.

Market authorities told Yicai that the 20 basis point reduction in this policy interest rate reflects the requirement for "substance," and under the market-oriented interest rate control mechanism, it will lead to a decline in various market benchmark interest rates.

Furthermore, the central bank's significant interest rate cut this time will continue to boost market confidence. With a series of incremental policy supports in recent times, market expectations have significantly improved, and the A-share market has seen consecutive days of gains, with the Shanghai Composite Index breaking through the 2800, 2900, and 3000 points thresholds, and trading volume has noticeably increased.

The aforementioned experts stated that against this backdrop, the People's Bank of China's announcement of the interest rate cut at 8 a.m. today is conducive to maintaining the continuity of policy intensity, consolidating the foundation for the sustained stability and improvement of the capital market, and providing ample momentum for the market's healthy and upward development.

Strengthening the policy attributes of the 7-day reverse repo rate

The content of the central bank's announcement also further strengthens the policy attributes of the 7-day reverse repo rate in the public market.The central bank stated that the operation interest rates for the 14-day reverse repo and temporary regular and reverse repurchase agreements in the open market continue to be determined by adding or subtracting points to the interest rate of the 7-day reverse repo operation in the open market, with the magnitude of the addition or subtraction remaining unchanged. The operation interest rates for other open market repurchase varieties will also be adjusted synchronously according to the rules. According to this rule, the operation interest rate for the 14-day reverse repo will be lowered to 1.65%; the operation interest rates for temporary regular and reverse repurchase agreements will be adjusted to 1.3% and 2.0%, respectively.

Central Bank Governor Pan Gongsheng previously pointed out at the Lujiazui Forum that the interest rate of the 7-day reverse repo operation has essentially taken on the function of the main policy interest rate. In market analysis, the central bank's announcement of a rate cut once again by adjusting the interest rate of the 7-day reverse repo operation in the open market further confirms the central bank's reform direction of improving the market-oriented interest rate control mechanism.

Zou Lan, head of the Monetary Policy Department of the central bank, also mentioned at a press conference held by the State Council Information Office on September 5 that the central bank has clearly defined the interest rate of the 7-day reverse repo operation as the main policy interest rate. The 7-day reverse repo has been changed from the original interest rate bidding to a fixed interest rate and quantity bidding, fully meeting the bidding needs of primary dealers. The interest rate is no longer the bidding result but is determined by the central bank based on the needs of implementing monetary policy, etc. The quantity is no longer a means for the central bank to regulate liquidity but is jointly determined by primary dealers based on policy interest rates and their market judgments, which is conducive to enhancing the initiative of institutions in managing liquidity.

"To judge whether the central bank has cut interest rates, it is only necessary to see if there has been a change in the interest rate of the 7-day reverse repo operation," said the aforementioned market authority. The interest rate of the 14-day reverse repo operation conducted on September 23 was 10 basis points lower than the previous one (before the Spring Festival), which was mistakenly interpreted as a rate cut by some market institutions. However, it was actually just a follow-up adjustment to the interest rate cut of the 7-day reverse repo operation on July 22 and did not have policy implications.