PBOC announces a new targeted MLF

The PBOC has announced a Targeted Medium-Term Lending Facility and an increase in relending and rediscount quotas by 100 billion RMB.

The PBOC announced today that it will initiate a Targeted Medium-Term Lending Facility (TMLF). The facility is for one year but can be extended twice, effectively making it three years. Qualified state owned banks, share holding banks, and large city commercial banks will be able to receive it. The interest rate to be charged is 15 bps lower than the standard MLF (which is currently 3.15%), but this liquidity must be used for lending to small and private enterprises.

The PBOC also said it will increase relending and rediscount quotas by 100bn RMB, for lending to small companies and private enterprises only.

These measures will not necessarily lead to lower interbank rates as they may act as substitutes for other liquidity measures. Lowering interest rates is easily justifiable in light of weak growth and lower inflation. But there seems to be significant determination to maintain currency stability because of the ongoing trade negotiations and concerns about the effects on the financial markets and economy. Lowering interbank interest rates would put additional pressure on the currency. Therefore, this is likely a small additional loosening measure to lower the cost of funding for commercial banks allowing them to lower their lending rates. The move was likely in response to recent weakness in economic activity and TSF growth, lower inflation, and the President’s stated desire to support private enterprises.

In the coming months, we anticipate further loosening measures which we expect will continue to be incremental and conditional on the changes in the economy. The probability of another RRR cut before the end of the year has fallen because of today’s moves. As a baseline case, we expect no cut before year-end.