The medium-term lending facility is a monetary policy tool for the central bank to provide medium-term base money. The medium-term lending facility influences the balance sheets of financial institutions and market expectations by regulating the cost of medium-term financing for financial institutions.
Thus, it guides financial institutions to provide low-cost funds to the real economy sectors that are in line with the national policy orientation, in order to promote the reduction of social financing costs.
Simply put, a medium-term lending facility is when the central bank lends money to a commercial bank, and when it expires the commercial bank pays the money back, along with a sum of interest. The level of the lending rate given by the central bank on this loan will indirectly affect the level of the lending rate of the commercial bank issuing the loan.
If the central bank wants commercial banks to give the market a low interest rate loans, then less interest; if you want commercial banks to give the market a high interest rate loans, then a little bit more interest, thus indirectly completing the regulation of the cost of social financing.
Overall, in the foreign exchange account channel to put base money in the case of a phased slowdown, the medium-term lending facilities play a role in supplementing the liquidity gap, is conducive to maintaining a neutral and moderate level of liquidity.
Difference between medium-term lending facility and reverse repo
Central bank reverse repo form: it is the central bank to purchase marketable securities from primary dealers;
MLF issuance form: it is the pledge method, and needs to provide high-quality bonds such as treasury bonds, central bank bills, policy financial bonds and high-grade credit bonds as qualified pledges.
2, the main role is different:
Central bank reverse repurchase: to release liquidity to the market
MLF role: to play the role of the medium-term policy rate, by regulating the cost of medium-term financing to financial institutions to financial institutions' balance sheets and market expectations to have an impact, to guide them to comply with the state's policy guidance to the real sector of the economy to provide low-cost funds, to promote the Reduce the cost of social financing.
3, the time cycle is different:
Central bank reverse repurchase: short-term behavior, generally one day, three days or seven days;
MLF period: generally longer, three months or six months ranging.
4, the operation is different:
Central bank reverse repo: the central bank lends money to commercial banks, commercial banks pledge bonds to the central bank;
MLF: carried out through bidding.