[21-11] Transition of excess reserve ratio and upper limit of deposit interest rate

November 30, 2021

Yosuke Tsuyuguchi: Professor, Faculty of Economics, Teikyo University

Biography

Graduated from the University of Tokyo Faculty of Law in 1980 and joined the Bank of Japan. He retired from the Bank of Japan in 2011 after serving as Secretary of the Economic Department of the Embassy of Japan in China, Deputy Director of the Hong Kong Office of the Bank of Japan, and the first Director of the Beijing Office of the Bank of Japan. After working at Shinkin Central Bank and Nihon University, assumed current position in April 2018. His publications include "Macro Analysis of the Chinese Economy" (co-author), "Joint Design of East Asian Regional Cooperation" (co-author), "Current Status and Challenges of China's Capital Market" (co-author), and "Reality of China's Foreign Economic Policy" (co-author). Such.

The People's Bank of China released the 2021 Q3 China Monetary Policy Implementation Report on November 19, 2021. The report includes a box on the excess reserve ratio and a box on deposit rate ceiling management. This time I would like to think about the contents of these two boxes.

Declining excess reserve ratio

The reserve requirement system requires that a certain percentage of the bank's deposit balance (statutory reserve amount) be deposited in the central bank's current account. The excess reserve ratio is the ratio of the amount deposited in excess of the statutory reserve amount to the statutory reserve amount. The excess reserve ratio was covered in the Q3 2018 Monetary Policy Implementation Report, and I covered it in this column in November of the same year. The column shows that the excess reserve ratio has gradually declined from 7-8% in 2001-2002, to around 2% since 2010, and has been on a downward trend to 1.3-1.7% in 2018. As one of the causes, he pointed out that there was a change in the reserve deposit method in September 2015. Before that, it was necessary to maintain reserve balances above the statutory reserve amount every day during the accumulation period, but with this change, the average balance during the accumulation period only needs to exceed the statutory reserve amount. As a result, it is no longer necessary to maintain an amount above the statutory reserve amount every day, and the excess reserve ratio has decreased. The reason why the excess reserve ratio still exists to some extent after that is that the interest rate on excess reserve deposits was relatively high at 0.72%.

And the People's Bank of China suggested in its box at the time that this decline in excess reserve ratios did not indicate a change in monetary policy stance. In the past, the People's Bank of China (PBOC) has expressed the idea that the money supply should be the intermediate target as a transmission channel for monetary policy, and that by increasing or decreasing the base money, which consists of reserve deposits and cash, the money supply will increase or decrease via the currency multiplier. rice field. Aside from the actual situation, according to this line of thinking, a decline in the excess reserve ratio can be taken as a sign of a monetary tightening policy. At the time, the People's Bank of China (PBOC) was implementing an accommodative monetary policy, and the decline in the excess reserve ratio was not a sign of monetary tightening.

In this box, the excess reserve ratio was around 4% around 2001, but around 2.2% from 2012 to 2016, around 1.9% in 2019, and at the end of each quarter in 2021. 1.5%, 1.2% for It is said that it fell to 1.4%. The reason for this is that in April 2020, the interest rate on excess reserves was lowered from 0.72% to 0.35%. The interest rate of 0.35% is the same level as the interest rate on liquid deposits of banks, and by depositing liquid deposits with the People's Bank of China, banks are unable to obtain interest margins, and the incentive to hold excess reserves has declined. In addition, the People's Bank of China (PBOC) appropriately supplies funds to the interbank market and keeps interbank market interest rates stable, reducing the need for banks to hold reserve liquidity. mentioned. He then points out that there is no direct relationship between the amount of total liquidity and the stability of market interest rates. A decline in the excess reserve ratio does not mean a contraction in liquidity, and the degree of easing or contraction in liquidity should be determined by looking at market interest rates.

Although monetary policy has returned to normal operation this year from a rapid level of easing in response to the corona crisis, it remains accommodative, and the decline in the excess reserve ratio is not a sign of monetary tightening. That's what I keep in mind. At the same time, as I noted in my column in May this year, the BOJ has shown a stance of placing greater emphasis on interest rates as an operational target for monetary policy.

Deposit Rate Limit Management

Next, let's take a look at the box about Deposit Rate Limit Management. On June 21, 2012, the upper limit of deposit interest rates was changed from a multiple of the deposit base interest rate to a fixed basis point (bp) added to the base interest rate. This point was also mentioned in this year's Q2 Monetary Policy Implementation Report, and was covered in this column in August of this year. This box describes what happened after that. The first part clearly states that the People's Bank of China (PBOC) led the Bank's industry body, the Market Interest Rate Autonomous Authority, to carry out this review. This is in contrast to the fact that when the upper limit on deposit interest rates was set in June 2016, it was voluntarily set by the autonomous body, and the People's Bank of China did not restore the interest rate regulation. be. The setting of the minimum lending rate and maximum deposit rate at that time was explained in this column in July 2016. This time, it can be said that it is clear that the People's Bank of China still regulates interest rates.

According to this box, the competition to acquire deposits at high interest rates was restrained to some extent by the conventional upper limit on deposit interest rates. The upper limit will be higher. In addition, some banks realized high interest rates by paying interest until maturity when canceling time deposits before maturity. Conventional deposit base interest rates are 0.35% for liquid deposits, 1.50% for 1-year time deposits, and 2.75% for 3-year time deposits. was determined. At state-owned large banks, the limits were 0.49% for liquid deposits, 2.10% for one-year maturities, and 3.85% for three-year maturities. After the revision, the base interest rate was set at +50bp for state-owned banks and +75bp for other banks. At state-owned banks, liquid deposits are capped at 0.45%, 1-year 2.00%, and 3-year 3.25%, with liquid deposits capped at +10bp. Compared to the upper limits for liquid deposits and time deposits with a maturity of one year or less, the upper limit for long-term time deposits with a maturity of two years or more has been significantly lowered. It also restricted some banks from competing for high interest rates.

Looking at the actual deposit interest rate movements, the weighted average interest rate for new deposits in September 2021 was 2.21%, down 0.28 percentage points from May before the revision. By maturity, compared to May, liquid deposits decreased the longer the term, with 0.00%, 1-year -0.04%, 2-year -0.25%, 3-year -0.43%, and 5-year -0.45%. width is larger.

In addition, the ratio of time deposits with a maturity of two years or more to new time deposits in September was 26.4%, down 10.6 percentage points from May, and it has been pointed out that the maturity composition of time deposits has improved.

Continuing a Moderate Monetary Policy While Securing Bank Interest Margins

In the lending market, the one-year lending market reported rate (LPR), which is the base interest rate for loans, will rise from 4.15% in February 2020. 4.05%, which was lowered to 3.85% in April of the same year, and the weighted average interest rate on loans fell sharply from 5.44% in December 2019 to 5.06% in June 2020, reaching 5.00% in September 2021. . Meanwhile, the weighted average interest rate on new deposits has risen from 2.38% in September 2020 to 2.49% in May 2021, partly due to intensifying competition, putting pressure on banks' profit margins. With the revision of the deposit rate cap in June, this will drop to 2.21% in September 2021, helping to secure interest margins for banks. This box also states that it will stabilize the debt cost of financial institutions, return the profits to the real economy, and promote a gradual decline in lending interest rates. Interest rates are becoming increasingly important as indicators for judging the direction of monetary policy. The 7-day reverse repo interest rate, one of the central bank's policy interest rates, was lowered from 2.4% to 2.2% in April 2020, and has remained at the same level since then.

This box points out that the weighted average 7-day repo interest rate in the interbank market during January-September 2021 remained at 2.18%, roughly at the same level as the policy rate. This means that the accommodative policy has been maintained since the spring of last year. In the future, various policy measures, such as manipulating the reserve requirement ratio, re-lending, and window guidance, are likely to be used in combination.

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