(Yicai) July 16 -- The People’s Bank of China has pared back the size of its medium-term lending facility since March and is expected to continue on this path for the rest of the year, as it shifts focus to short-term rates, according to an expert.

The central bank injected CNY100 billion (USD13.8 billion) of one-year MLF loans into the financial system yesterday, keeping the rate unchanged at 2.5 percent, to replace CNY103 billion of lending that expires this month. It was the fourth time this year that the PBOC added less than it withdrew.

This gradual shrinkage will reduce the role of the current benchmark rate, which may lead to its complete retirement, said Wen Bin, chief economist at China Minsheng Bank. When making future rate cuts, the PBOC may primarily transmit them through seven-day reverse repurchase rates, he added.

The bank also injected CNY129 billion through seven-day reverse repos yesterday at an unchanged rate of 1.8 percent, replacing CNY2 billion (USD275.3 million) that expired the same day.

The moves were aimed at offsetting the impact of tax payment peak and keeping liquidity in the banking system at a reasonable and ample level, the PBOC noted.

The PBOC introduced the MLF as a liquidity tool in 2014 before confirming its status as a medium-term policy rate in 2019. It then became a market rate after being linked to the loan prime rate.

Short-term market rates are usually closer to the PBOC’s operation rates, while MLF rates mainly diverge from market rates of the same maturity, Wen noted. Interest rates on one-year AAA-rated interbank negotiable certificates of deposit range between 1.9 percent and 2 percent, much lower than the MLF rate, Wen added.

“In the future, the PBOC will consider using a specific short-term operations rate as its main policy rate,” Governor Pan Gongsheng said on June 19. “Seven-day reverse repo operations have basically assumed that role, with monetary policy tools of longer maturities having their policy rate roles weakened.”

On July 8, the PBOC announced it will carry out overnight temporary repo and reverse repo operations between 4 p.m. and 4.20 p.m. on working days to maintain reasonable and sufficient liquidity in the banking system and improve the accuracy and effectiveness of open market operations. The temporary repo and reverse repo rates will be 20 basis points lower and 50 bps higher than the seven-day reverse repo rate, respectively.

Based on the most recent seven-day reverse repo rate, the temporary repo rate is 1.6 percent, and the reverse repo rate is 2.3 percent.

Editors: Dou Shicong, Futura Costaglione