Post-Dollar Rate Cut: PBOC's 3 Strategic Moves

A few days ago, many people were still asking why the US dollar cut interest rates by 50 basis points at once, but our central bank remained inactive. In the blink of an eye, these days the central bank has taken consecutive actions, completely dispelling everyone's doubts. Many people have started singing praises again. Can't you wait and see, do you have to express your stance so urgently? The most critical question is, what other major moves will the central bank have? Is a major easing coming?

Everyone knows that the US dollar's interest rate hikes and cuts are a war without smoke. Many people say it's a Sino-American financial war. In fact, the Federal Reserve is not only competing with us but also with the whole world. This is the war between the US dollar and the world.

The US dollar is fighting for leadership and hegemony, and more importantly, for interests.

At the same time, the US dollar is also struggling internally within the United States, such as suppressing inflation. Some people say this is an offensive launched by the American financial capital group against the industrial capital group.

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Regardless of whether there is a conspiracy theory or not, these things exist in reality. In other words, the US dollar's interest rate hikes and cuts mean danger for the whole world and need to be carefully dealt with.

Some people say, how can it be wrong for the US dollar to raise interest rates and also wrong to cut them? Asking such a question requires additional basic knowledge, which we will not elaborate on today.In simple terms, as the world's currency, aggressive interest rate hikes are artificially creating capital flows, and subsequent rate cuts also create capital flows. It's like a tightly formed military formation; once it starts moving, it will reveal vulnerabilities.

Therefore, the Federal Reserve's decision to cut interest rates by 50 basis points at once, rather than 25, is clearly an offensive move, a dangerous probe, and even a lure operation.

Who is the Federal Reserve attacking, probing, and luring?

The Federal Reserve's main targets are the central banks of a few major countries.

Because a rate cut means the devaluation of the dollar, and the flight of dollar capital, the Federal Reserve's formidable task is to prevent the dollar from depreciating too quickly and to prevent dollar capital from fleeing too rapidly.

The logic is straightforward: after more than two years of rate hikes, a large amount of dollars have been concentrated in the three major financial markets of U.S. stocks, U.S. bonds, and the U.S. dollar, directly pushing up these markets and creating a significant amount of bubbles.

If the dollar flees too quickly, and the three major markets are suddenly stripped of huge amounts of funds, it could easily lead to the bursting of bubbles, or even a direct collapse.

What to do? The key to the dollar's return with interest rate hikes is the interest rate differential, and the key to the dollar's flight with rate cuts is also the interest rate differential. Therefore, the method to prevent the dollar from fleeing too quickly is for the central banks of the main major countries to follow the dollar's rate cuts and maintain a certain interest rate differential.

Of course, the central banks of the major countries cannot simply follow the United States' orders; that would be surrendering, and they would be the ones to suffer.So, the start of the US dollar's interest rate cuts signifies the beginning of another war.

War implies that both sides will have to make moves against each other. How to make these moves? The current round is quite spectacular.

On September 19th, the Federal Reserve made a significant move by cutting interest rates by 50 basis points.

On the same day, the Bank of England decided not to cut interest rates, which is essentially ignoring the United States.

On September 20th, the Bank of Japan also chose to stand pat, another disobedient one.

On September 20th, the People's Bank of China also announced that the Loan Prime Rate (LPR) would remain unchanged, which means the benchmark market interest rate stays put, clearly aiming to stabilize first.

On September 23rd, the People's Bank of China conducted a 7-day reverse repo of 160.1 billion yuan at an interest rate of 1.70%; a 14-day reverse repo of 74.5 billion yuan at an interest rate of 1.85%, while the previous 14-day reverse repo interest rate was 1.95%.

On September 24th, it was announced again that they would lower the reserve requirement ratio, reduce the interest rates on existing mortgages and the down payment ratio for second homes, as well as lower the reverse repo interest rates, among other measures.

Some say this is a disguised way of lowering interest rates. We understand that the central bank's intentions are mainly threefold.Firstly, to soothe market sentiment, secondly, to send a signal of easing to the market, and thirdly, this is a highly controlled method of targeted interest rate cuts, which not only controls risks but also serves as a response and even a counterattack to the Federal Reserve. This is a very ingenious move, and it is estimated that the Federal Reserve is left dumbfounded.

At the same time, the central bank conducted reverse repo operations of 568.2 billion on September 18th, 523.6 billion on September 19th, and 517.9 billion on September 20th. Coupled with the increase of 507 billion in government bonds in August, the total of government bonds and reverse repo operations amounts to approximately 2.1 trillion in base currency, which was quickly injected into the market.

All these operational methods are highly controllable, and there is no need to worry about the Federal Reserve's underhanded tactics. Our economy needs stimulation, but at the same time, we must guard against the impact of fluctuations in U.S. dollar interest rate policies. The central bank has gone to great lengths.

The most basic LPR interest rate remains unchanged, but it does not hinder the release of liquidity to save the market. This kind of move is difficult for the Federal Reserve to find a flaw in.

So, what other major moves will the central bank have next?We believe that the central bank will still adjust in a controllable manner according to our own economic development situation.

If the Federal Reserve disregards everything and lowers the interest rate all the way to around 2%, the situation will undergo a fundamental change.