Monetary Policy Must Consider Steady Growth and Promote Reform

Monetary Policy Must Consider Steady Growth and Promote Reform

Currently, the monetary policy of foreign central banks tends to be relaxed, while China's monetary policy remains normal. Yi Gang, governor of the Central Bank, made it clear at a press conference recently that China's monetary policy "should remain firm, adhere to a steady orientation" and firmly refrain from "flooding". Our country is in the period of economic transformation and structural adjustment. In addition to counter-cyclical adjustment, monetary policy should also meet the requirements of high-quality economic development.

The decline in the quotation of LPR (loan base interest rate) does not mean the reduction of interest rate. After the reform of LPR formation mechanism, the market has paid much attention to the quotation of LPR. Some people believe that the essence of LPR reform is to cut interest rates, but not necessarily. LPR quotation is mainly the role of market factors, through the way of reform, dredge the transmission of monetary policy, reduce the financing cost of enterprises. In fact, LPR formation mechanism reform and interest rate reduction in the traditional sense are two different things. Interest rate cuts generally refer to the central bank lowering policy interest rates. By adjusting the target interest rate range of the Federal Fund, the Federal Reserve cut interest rates. In the past, China raised or lowered interest rates by adjusting the benchmark interest rate of deposits and loans. After the reform of LPR formation mechanism, if interest rate is cut in the future, it will mainly adjust the policy interest rate represented by MLF. At present, the central bank has not adjusted these interest rates.

In fact, the reform of the formation mechanism of LPR is to smooth the transmission of monetary policy and guide the real lending rate down through the reform of interest rate marketization. At the meeting of the Financial Stability and Development Committee of the State Council held on August 31, it was pointed out that the counter-cyclical adjustment of macroeconomic policies should be strengthened and the transmission of monetary policies should be dredged vigorously.

In the past, China's loan pricing refers to the benchmark deposit and loan interest rates, which have remained unchanged for many years. Therefore, the central bank's operating interest rates in the open market, such as OMO interest rates and MLF interest rates, mainly affect the interest rates of financial markets, but it is difficult to smoothly transmit them to the real loan interest rates. After the reform of the LPR formation mechanism, the loan pricing has a new anchor, which is the LPR quotation. LPR uses the pricing method of "Open Market Operating Interest Rate plus Point", which is the core content of this reform. In this way, the central bank's policy interest rate changes can be transmitted to the real lending rate channel, that is, the monetary policy transmission path can be achieved through the "monetary policy interest rate-LPR-lending rate" channel.

It remains to be seen whether interest rates will be cut because of the ample space for monetary policy. As far as monetary policy is concerned, first of all, after the reform of LPR formation mechanism, the central bank has more financial macro-control tools, such as the adjustment of MLF interest rate to guide the real lending rate. At present, MLF interest rate is at the highest level in history, and there is more room for adjustment. Secondly, the monetary policy of foreign central banks has generally tended to be relaxed recently. The European Central Bank announced the resumption of quantitative easing and the Federal Reserve cut interest rates twice in the year, all of which provide more room for China's monetary policy adjustment.

However, monetary policy, especially the adjustment of interest rates, should take into account not only the counter-cyclical adjustment of the economy, but also the internal and external balance, and long-term consideration, so as to promote the high-quality development of the economy. The hazards of "flood irrigation" are inflationary, asset prices and structural adjustment, which will increase the cost of reform and continue the backward capacity that should be eliminated. In addition, the factors of exchange rate stability should also be taken into account. China is facing increasing external uncertainties. In order to maintain the basic stability of the RMB exchange rate, we should also avoid "flooding". The author believes that the effect of the reduction is still to be observed, and we should continue to pay attention to the economic data in the third quarter.

Monetary policy is often a step-by-step, step-by-step approach, which plays a major role in curbing the sharp decline of the economy in the short term, but has limited effect on economic restructuring and technological progress. Countercyclical regulation through monetary policy is not without cost, and excessive use should be avoided as far as possible. In addition to easily leading to high inflation and asset price pressures, excessive reliance on monetary policy may even hinder China's economic restructuring and transformation and upgrading, which is also the fundamental reason for China's adherence to sound monetary policy for many years. As Yi Gang said, "In a few years, if any country, especially the major economy, maintains normal monetary policy, such an economy should be the highlight of the global economy and the envy of the market."