Summary of Key Points
The LPR (Loan Prime Rate) announced on July 20th remained unchanged from the previous month: 3.0% for one-year loans and 3.5% for loans over five years. The direct reason for this stability is that the policy rate (the central bank's reverse repurchase rate) has not been adjusted, and banks, due to increased financing costs and record-low net interest margins, lack the incentive to lower the LPR. Currently, the central bank is more focused on "comprehensive financing costs" rather than directly cutting interest rates. However, experts predict that a policy-based interest rate cut of 10 basis points could be implemented in the second half of the year (likely by the end of the third quarter), which would drive down the LPR. Additionally, to stabilize the housing market, there is a possibility of targeted measures to significantly lower the 5-year LPR, combined with fiscal subsidies to reduce mortgage rates.
Why Didn't the LPR Change in July? Two Main Reasons
The pricing logic for the LPR is "policy rate + bank margin." The lack of change this time is mainly due to two factors:
1. No change in policy rate: The LPR is anchored by the central bank's 7-day reverse repurchase rate, which represents the cost for banks to borrow from the central bank. This rate has remained unchanged since last month, thus stabilizing the base for the LPR.
2. Banks are reluctant to reduce their margins: Banks set their margins based on their own costs and profit margins. Recently, banks have faced increased financing costs: firstly, the cost of borrowing from each other in the money market (e.g., DR001) has risen close to the policy rate; secondly, the yields on interbank certificates of deposit (bonds issued by banks to other institutions) have also increased. More importantly, banks' net interest margins (the difference between loan and deposit interest) fell to a record low of 1.4% in the first quarter, meaning they are already making less profit. Therefore, there is no incentive for banks to lower the LPR margin.
What Is the Central Bank Doing Instead of Directly Cutting Interest Rates? Focusing on "Comprehensive Financing Costs"
The central bank is not unwilling to reduce costs but is adopting a more comprehensive approach:
- What are comprehensive financing costs? These include not only loan interest but also various fees and bond financing costs. For example, when businesses take out loans, they may have to pay for evaluation and guarantee fees, which all contribute to the overall financing cost.
- What Actions Has the Central Bank Taken? At the beginning of this year, the central bank lowered the rates on structural monetary policy tools (such as special loans supporting technology and agriculture, rural areas, and farmers). It has also required banks to disclose the comprehensive costs of business loans to reduce arbitrary fees. Additionally, it has encouraged businesses to issue bonds—business bond financing totaled 2.07 trillion yuan in the first half of the year, an increase of over 900 billion yuan compared to last year. Bond interest rates are usually lower than loan interest rates, which can help businesses save money.
- Why This Approach? While directly cutting interest rates is quick, it may lead to inflation or exchange rate fluctuations. A more comprehensive approach to reducing costs is more prudent as it can precisely help businesses reduce their burdens and promote a better financing structure (e.g., by encouraging more borrowing through bonds rather than loans).
Will There Be an Interest Rate Cut in the Second Half of the Year? Experts Say "Very Likely," Conditions Are Met
The Dongfang Jincheng team predicts that the central bank may implement a 10-basis-point policy-based interest rate cut in the second half of the year, which would lower the LPR. There are two main reasons for this:
1. Need to Stabilize Growth: Export growth is likely to slow down in the second half of the year due to high oil prices and changing global economic conditions. Domestic consumption and investment also need to be boosted. Lowering interest rates can reduce the cost of borrowing for businesses and residents, encouraging spending and investment.
2. Conditions Are Favorable: Inflation is moderate (the impact of high oil prices is diminishing, and rising chip prices have not spread to many goods), so a rate cut will not cause inflation to soar. The RMB exchange rate is stable, and a rate cut will not lead to a significant depreciation of the currency.
Experts expect the interest rate cut to occur around the end of the third quarter, which would further reduce the LPR and help businesses and residents save money.
What Measures Are There to Stabilize the Housing Market? Possible Significant Reduction in the 5-Year LPR
The LPR for loans over five years directly affects mortgage rates (most mortgages are for this period). Currently, high mortgage rates are a major factor suppressing housing demand. Experts believe that:
- In the future, there may be targeted measures to significantly lower the 5-year LPR, combined with fiscal subsidies (e.g., government-funded interest discounts), to significantly reduce mortgage rates.
- This would directly reduce monthly mortgage payments and stimulate housing demand, reversing the current cautious attitude towards buying homes, as high mortgage rates are a major deterrent for many people.
Conclusion
The stability of the LPR this time is temporary, as the central bank is using various measures to reduce costs. There is a high probability of an interest rate cut in the second half of the year, and there may be targeted support for the housing market. For individuals, mortgage rates are likely to decrease, reducing the cost of borrowing. For businesses, lower bond financing costs and overall financing expenses will make it more advantageous.