Reverse repurchase agreements create the smallest scale in over ten years, with the central bank anchoring and strengthening monetary policy regulation

Asking AI · How Middle East Conflict Raises Oil Prices and How Monetary Policy Should Respond to Imported Inflation?

On the first trading day of April, the People’s Bank of China (PBOC) issued a clear signal through open market operations. On that day, the central bank conducted a 500M yuan 7-day reverse repurchase operation at a fixed rate via a fixed-rate, quantity-based bidding method, marking the lowest scale since routine reverse repos began in 2015.

Market analysts believe that this “small-scale” operation does not indicate a shift toward tightening monetary policy but is a forward-looking arrangement balancing internal liquidity stability and external risk prevention.

Currently, escalating geopolitical conflicts in the Middle East are pushing up international oil prices, and concerns over imported inflation continue to ferment, with external uncertainties rising significantly. The central bank recently held a quarterly monetary policy meeting, clearly defining the next phase of regulation and strengthening assessments of external shocks.

According to the views of interviewed experts, during the sudden increase in external uncertainties, domestic monetary policy will maintain ample market liquidity while also periodically leaning toward stabilizing prices, with the timing of reserve requirement ratio (RRR) cuts and interest rate reductions possibly delayed. From the current situation, the constraints of imported inflation on monetary policy are limited; China has both tools and experience to respond.

Reverse Repo Operations Hit Over Ten-Year Low

On April 1, the central bank conducted a 500M yuan 7-day reverse repo at a fixed rate, with 78.5B yuan maturing that day, resulting in a large net withdrawal.

Wang Qing, Chief Macro Analyst at Orient Securities, judged that the reason for the smallest-scale 7-day reverse repo in over ten years is the recent sustained stable-to-easy liquidity environment, coupled with liquidity easing at the beginning of the month. This also signals guidance to stabilize market liquidity and prevent major market rates from deviating excessively downward from the policy rate, helping to stabilize market expectations.

Reviewing previous operations, since the beginning of the year, the central bank has continuously injected liquidity through Medium-term Lending Facility (MLF) and outright reverse repos, totaling trillions of yuan in medium-term liquidity. During the relatively loose liquidity environment, the central bank net withdrew 250 billion yuan in March, and at key seasonal transition points, successful large-scale reverse repos helped smooth out end-of-quarter liquidity fluctuations. Under the central bank’s care, liquidity has shown no obvious volatility, maintaining stability across the season change.

Entering April, overall funding rates remained stable without the typical early-quarter fluctuations, creating conditions for the central bank to implement small-scale operations. Market rates on that day reflected this: on April 1, liquidity was slightly loose, with small declines in funding prices. The Shanghai Interbank Offered Rate (Shibor) collectively fell: overnight Shibor was 1.2700%, down 0.70 basis points; 7-day Shibor was 1.4210%, down 1.70 basis points; 14-day, 1-month, and 3-month rates also declined slightly.

Wang Qing believes that during this period of relatively loose liquidity, the 250B yuan net withdrawal in March aimed to guide major market rates around the policy rate within a reasonable range. Therefore, it is possible that outright reverse repos will continue to net withdraw in April.

Imported Inflation Disruptions

The evolving situation in the Middle East continues to be a core external variable facing China’s macroeconomic and monetary policy environment.

“During the evolution of the Middle East situation, the current domestic monetary policy mainly aims to maintain ample liquidity and stabilize market expectations. This may explain why liquidity at month-end and quarter-end is not tight but rather easing,” Wang Qing emphasized.

Market analysts note that the current operational environment for domestic monetary policy is becoming increasingly complex. Since late February, ongoing tensions and escalation in the Middle East have sharply pushed up international oil prices, significantly increasing the risk of imported inflation for China, with external uncertainties also rising.

Market surveys further confirm this trend. Huatai Securities conducted a questionnaire survey in March, with results showing that investors are mainly focused on geopolitical conflicts and inflation. Among them, 49% of investors are more optimistic about the full-year nominal GDP growth compared to late February, mainly due to rising inflation expectations. Meanwhile, rising imported prices add multiple uncertainties to actual economic growth, causing supply chain concerns and ongoing impacts on overseas demand, corporate costs, and residents’ purchasing power.

In response to the intensifying external shocks, China’s latest policy assessments have made targeted adjustments. The People’s Bank of China’s Monetary Policy Committee recently held the first-quarter meeting for 2026, updating the language from the fourth-quarter 2025 meeting. The previous statement about “insufficient global economic growth momentum and increasing trade barriers” was revised to “weak global economic momentum, frequent geopolitical conflicts and trade disputes,” emphasizing that China’s economy is currently facing severe external shocks.

The meeting further stated that the impact of external environment changes has deepened, with weak global economic momentum, frequent geopolitical and trade conflicts, and divergent economic performances among major economies. Uncertainties remain regarding inflation trends and monetary policy adjustments. China’s economy still faces issues such as strong supply but weak demand and external shocks.

CITIC Securities Chief Economist Ming Ming believes that since the deterioration of the US-Israel-Iran conflict in the first quarter, there are two main impacts: one, potential long-term shocks to external demand due to recession expectations abroad; two, challenges to China’s price management from imported inflation in commodities like crude oil. The central bank will likely pay more attention to hedging external geopolitical risks and trade conflicts’ impacts on imported inflation.

Everbright Securities Chief Fixed Income Analyst Zhang Xu believes that, from the current situation, the risk of imported inflation has limited constraints on monetary policy. Recently, CPI and PPI increases remain moderate, and promoting reasonable price recovery remains a policy focus. A proper rise in residents’ consumption prices and positive changes in producer prices are beneficial for improving corporate operations, market expectations, employment, and income, thus supporting economic circulation.

Central Bank Meeting Sets Direction

In response to multiple challenges such as imported inflation and external shocks, the first-quarter monetary policy meeting has clarified the next phase of regulation, establishing a core framework for policy implementation.

The meeting proposed leveraging the combined effects of incremental and stock policies, using multiple tools comprehensively, strengthening monetary policy regulation, and adjusting the policy’s strength, pace, and timing based on domestic and international economic and financial conditions and market operation.

Overall, the core language of this meeting’s monetary policy remains aligned with the overall tone set by the Central Economic Work Conference, with no substantial shift compared to the previous quarter.

China Galaxy Securities Chief Macro Analyst Zhang Di believes this indicates that, amid rising external uncertainties, the People’s Bank of China will maintain policy independence and stability, keeping its policy stance firm and market expectations steady.

Huatai Securities’ research suggests that, under the volatile external environment, the overall direction of monetary policy remains supportive. However, in the second quarter, when inflation is rising rapidly and geopolitical tensions are frequent, the urgency for RRR cuts and interest rate reductions may be lower, given the multiple tools available to coordinate supply-side measures.

Drawing on historical experience, Zhang Di compared the central bank’s responses during the 2007–2008 period of comprehensive inflation and the 2021–2022 period of structural inflation.

He believes that historically, in addressing imported inflation, China’s monetary policy framework has focused on: first, maintaining policy independence; second, closely monitoring the transmission from PPI to CPI, with the nature of inflation (structural vs. broad-based) being a key factor influencing policy; third, maintaining exchange rate flexibility to mitigate external shocks.

Considering current conditions, Zhang Di suggests that this round of imported inflation is likely to be structural. The central bank will not tighten monetary policy but will keep liquidity ample, with room for RRR and interest rate cuts within the year. It may also develop or optimize structural monetary tools to support green energy, address energy shortages, and ensure energy supply.

Wang Qing added that in March, domestic prices showed a strong upward trend, which could disturb economic growth momentum. In the short term, during the sudden rise in external uncertainties, domestic monetary policy will continue to keep liquidity ample while also leaning toward stabilizing prices, possibly delaying RRR and interest rate cuts. If external shocks further disrupt domestic growth, monetary policy may adopt a more accommodative stance.

Zhang Xu further emphasized that external factors and price pressures have not yet rigidly constrained monetary policy. The authorities will continue to maintain ample liquidity, aligning social financing and money supply growth with economic growth and inflation expectations. However, many uncertainties remain regarding international energy prices, and imported inflation effects need further observation. The central bank will continue implementing moderately loose monetary policy, increasing countercyclical and cross-cyclical adjustments, leveraging both aggregate and structural tools, coordinating monetary and fiscal policies, and promoting stable growth and reasonable price levels.

(This article is from Yicai.com)