Policy-based interest rate cuts are implemented today.

On May 7, the Governor of the People's Bank of China Pan Gongsheng announced at a press conference of the State Information Office that in order to implement a moderately loose monetary policy and strengthen support for the real economy, starting from May 8, the open market's seven-day reverse repurchase operation interest rate will be adjusted from the previous 1.50% to 1.40%, downgraded by 0.1 percentage point.

On May 8, the central bank carried out a 7-day reverse repurchase operation of 158.6 billion yuan with fixed interest rate and quantity bidding, with an operating interest rate of 1.40%, a bid volume of 158.6 billion yuan and a winning bid volume of 158.6 billion yuan. Wind data shows that no reverse repurchase expired on the same day. Based on this calculation, the net injection of 158.6 billion yuan per day was calculated.

This is another interest rate cut since the 7-day reverse repurchase operation rate was lowered from 1.7% to 1.5% on September 27 last year.

The central bank stated that the operating interest rates of 14-day reverse repurchase and temporary positive and reverse repurchase in the open market continue to be determined at the 7-day reverse repurchase operation interest rate in the open market, and the increase or decrease point range remains unchanged. According to this rule, the 14-day reverse repurchase operation rate will be lowered to 1.55%; the temporary positive and reverse repurchase operation rates will be adjusted to 1.2% and 1.9% respectively.

The 7-day reverse repurchase rate cut is expected to drive the loan market quotation rate (LPR) to decline by about 0.1 percentage point simultaneously. At the same time, the central bank will also guide commercial banks to lower deposit interest rates through interest rate self-discipline mechanisms and strengthen interest rate coordination.

Reduce financing costs of the real economy

This interest rate cut is regarded as a reflection of the active implementation of the requirements of the Political Bureau of the Central Committee.

On April 25, the meeting of the Political Bureau of the Central Committee demanded that "start the implementation of more active and effective macroeconomic policies, make good use of more active fiscal policies and moderately loose monetary policies" and "timely cut reserve requirement ratio and interest rate cuts, maintain abundant liquidity, and increase support for the real economy."

Authoritative experts said that the interest rate cut fully reflects the moderately loose monetary policy stance and is a powerful measure to support stabilizing employment, enterprises, markets and expectations. "The interest rate cut fully reflects the increased countercyclical adjustment efforts."

In recent times, domestic PPI has continued to be in a negative growth range, and CPI has continued to operate at a low level, falling below 0 in the past two months. With the announcement of US tariff policy, global expectations for economic outlook weakened, prices of basic industrial products have declined significantly, coupled with the sharp decline in international oil prices, the overall industrial products prices have fallen significantly, and the subsequent year-on-year decline in PPI may further expand. The relatively weak food prices and oil prices may lead to the same decline in CPI, and the overall downward pressure on prices may further increase.

Wen Bin, chief economist of Minsheng Bank, believes that prices continue to be sluggish and increase the real interest rate level, and it is urgent to reduce corporate financing costs and stabilize credit levels by cutting interest rates.

The recent overall decline in bill interest rates, the decline in net financing of certificates of deposit, and the increase in the scale of financial output of the banking system may be caused by a decline in capital demand. In Wen Bin's view, this also requires stimulating financing demand by lowering the actual interest rate level and stabilizing the credit process.

Deposit interest rates are about to be further reduced

While announcing the interest rate cut, Pan Gongsheng also stated that it would guide commercial banks to lower deposit interest rates accordingly through the interest rate self-discipline mechanism. The market predicts that this means that a new round of deposit interest rate cuts will begin soon.

In recent years, deposit interest rates have continued to decline. However, due to different factors such as market competition, customer positioning, and debt structure, different commercial banks have different rhythms and amplitudes of adjusting deposit interest rates.

For example, some banks have adjusted their issuance plans for large-denomination certificates of deposit, fixed deposits, and agreed deposits, as well as removed smart notification deposit products, mainly to reduce deposit interest rates. Due to factors such as brand image, private banks have relatively weak deposit absorption ability. In the past, they generally used higher interest rates to attract customers, so there is more room for interest rate reduction. Lowering deposit interest rates and reducing debt costs will help private banks maintain basic stability in interest rate spreads and improve their ability to develop stably.

Dong Ximiao said that as deposit interest rates fall and residents' expectations improve, the attractiveness of the capital market and financial management market may be further enhanced. In the next stage, while promoting a steady decline in the cost of comprehensive social financing, the pressure on commercial banks to narrow the interest rate spread is still high. Therefore, deposit interest rates should continue to be lowered to further reduce capital costs and alleviate the pressure of narrowing interest rate spreads. In addition to lowering deposit interest rates, commercial banks should also reduce interest subsidies and fees other than interest, and further reduce the hidden costs of deposits.

Exchange rate stabilizes temporarily

Since the beginning of the year, monetary policy has made a decision on the timing, and the focus of the policy has changed to stabilizing the exchange rate, stabilizing the interest rate spread and preventing interest rate risks. Especially since April, the pressure on RMB depreciation has increased under the influence of tariffs, and the central bank has faced dual constraints on net interest rate spread and internal and external exchange rate.

The RMB exchange rate has performed well recently. On May 5, the offshore RMB once rose above the 7.20 mark during the session, the first time since November last year, setting a new high in the past six months. The onshore RMB exchange rate has continued to appreciate since April 28, closing at 7.2169 on May 6, up 463 points during the day.

On May 8, the mid-price of the RMB exchange rate against the US dollar fell by 68 points to 7.2073. As of 9:35 on that day, the onshore RMB was 7.2382 against the US dollar, with a depreciation of 0.18% on the day; the offshore RMB was 7.2356 against the US dollar, with a depreciation of 0.10% on the day.

Many experts believe that although the Federal Reserve's interest rate meeting in May has maintained interest rates unchanged, the probability of a US economic recession has risen recently, the RMB exchange rate has risen, and policy constraints have been relatively weakened, which has brought about certain room for policy implementation. This rate cut will not put pressure on the RMB exchange rate depreciation.

Wang Qing said that the trend of the RMB over the past period has repeatedly proved that economic fundamentals rather than the interest rate gap between China and the United States are the main factors that determine the RMB exchange rate.

Galaxy Securities Research Report believes that from the perspective of the external environment, the expectation of a global recession has increased due to the increase in the expectation of a global recession, regardless of whether the Federal Reserve cuts interest rates in the short term, the probability of a looser global policy environment gradually increasing. Due to the sharp weakening of the US dollar index recently, the depreciation of the RMB exchange rate and the pressure of foreign exchange outflow have been significantly alleviated, which has also provided a valuable time window for lowering the reserve requirement ratio and interest rate, reflecting the principle of "camera decision" in moderately loose monetary policy.

Galaxy Securities also mentioned that the policy interest rate cut by 10BP (basis point) is smaller than the reduction in September last year, mainly because there is still uncertainty about the time when the Federal Reserve cut interest rates again, and exchange rate pressure cannot be fully released. If the Fed's interest rate cut is expected to rekindle in the future, it is still possible to cut interest rates by 10 to 20BP in a comprehensive manner, and the time window may be in July.

Wen Bin also said that the phased stabilization of the RMB exchange rate has created a time window for my country's policy efforts. If the Federal Reserve's interest rate cuts accelerate and increase in the range, it will also expand space for further strengthening my country's policies and timely implementation.