How to Reduce LPR, Two "Interest Rate Reductions" in Three Months: Why Asymmetric Economic Reductions in August | Interest Rates | Asymmetric Reductions

The central bank has adjusted its medium-term and short-term policy interest rates twice in three months.

On August 15th, the People's Bank of China announced that in order to hedge against factors such as peak tax periods and maintain reasonable and sufficient liquidity in the banking system, it will carry out a 7-day open market reverse repurchase operation of 204 billion yuan and a convenient 1-year medium-term lending operation of 401 billion yuan, fully meeting the needs of financial institutions. In terms of closely watched interest rates, the one-year MLF winning bid rate has been lowered from 2.65% to 2.5%, and the 7-day reverse repurchase rate has been lowered from 1.90% to 1.8%, with 15 basis points and 10 basis points respectively.

The market expects that the loan market quotation interest rate, which will be released next Monday, is also expected to follow suit.

Asymmetric interest rate cuts for medium and short-term policy rates

Although the market had expectations for a "rate cut," the timing and intensity of the policy rate cut exceeded market expectations.

Among them, the single reduction of 15 basis points in the one-year MLF bid rate is only second to the 20 basis points in April 2020.

"Looking back at the history of MLF operating interest rate adjustments, except for the sudden outbreak of the epidemic in early 2020, where MLF operating interest rates were lowered twice in February and April, the interval between other adjustments was at least 5 months. As a result, interest rates were lowered again after two months, and the MLF interest rate was lowered by 0.15 percentage points, significantly exceeding market expectations," said Wang Qing, Chief Macro Analyst at Oriental Jincheng.

Compared to a 15 basis point decrease in the MLF rate, which serves as the medium-term policy rate, on the same day, the 7-day reverse repurchase rate, which serves as the short-term policy rate, was lowered by 10 basis points.

Wang Qing stated that the asymmetric interest rate cuts within the policy interest rate system may be related to the current policy focus on guiding the downward cost of financing for the real economy, while also suppressing the arbitrage of funds in the money market.

It can be seen that at the press conference held by the four departments in early August to promote high-quality economic development by combining macroeconomic policies, Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, pointed out that in order to scientifically and reasonably grasp the level of interest rates, it is necessary to timely and moderately carry out countercyclical adjustment according to the economic and financial situation and macroeconomic regulation needs, while also balancing growth and risk, internal and external factors, preventing fund arbitrage and idle, improving policy transmission efficiency, and enhancing the stability of bank operations.

Why did we lower policy interest rates beyond expectations

"The interest rate cuts and incremental sequels of reverse repurchase and MLF have both released clear monetary policy signals, reflecting the warmth of macroeconomic regulation and creating a favorable monetary and financial environment for stable growth of the real economy." Zhang Xu, Chief Analyst of Fixed Income at Everbright Securities, pointed out.

Wen Bin, Chief Economist of China Minsheng Bank, pointed out that the two interest rate cuts in three months are mainly due to the weak endogenous driving force for economic recovery and insufficient effective demand. It is urgent to accelerate coordinated efforts through policies such as interest rate cuts to strengthen countercyclical regulation, boost confidence, stabilize expectations, and stabilize growth. The recently released macro and financial data is weaker than expected, indicating a significant weakness in the demand for real financing. It is necessary to reduce the risk of private sector balance sheet recession and decreased risk appetite through interest rate cuts, and fully support the real economy.

"At the same time, the current profitability of enterprises is declining, the turning point of medium - and long-term loans for enterprises is approaching, the marginal support is declining, the overall credit of residents is shrinking, and the pressure on government debt interest payments is increasing. Lowering costs, expanding investment, and promoting consumption are still important tasks. Therefore, by lowering interest rates, it can drive the decline of interest rates in the money market, bond market, especially in the medium - and long-term credit market, which will help further reduce the financing costs of the real economy, achieve the goal of reducing costs for enterprises, promoting stable employment, assisting stable investment, and stimulating the endogenous momentum of private investment, as well as strengthening the coordination between fiscal and monetary policies and enhancing the sustainability of government debt, creating a good monetary and financial environment for the stable recovery of the domestic economy in the future." Wen Bin pointed out.

Will LPR be asymmetrically lowered this month?

With a 15 basis point reduction in MLF rates, the LPR cut, which will be announced on August 21st, is almost certain.

Zhang Xu believes that the LPR for 1-year and 5-year and above terms reported on August 21st is more likely to experience a slight decline, which is conducive to maintaining stable growth of monetary credit, promoting comprehensive financing costs for enterprises, and steadily lowering interest rates for residential credit. Today's policy interest rate cut and the likely LPR downturn next Monday both have the effect of boosting market confidence and stimulating credit demand. The future trend of credit growth is clear, and a rational and optimistic attitude should be maintained towards the next stage of credit.

At the same time, the market expects that this month's LPR may have an asymmetric interest rate cut.

Wen Bin believes that driven by the further reduction of MLF interest rates in August, the LPR for this month is expected to follow suit, with 1-year and 5-year and above LPRs possibly lowered by 10 basis points and 15 basis points respectively.

Wang Qing believes that given the current state of the real estate market, there is a higher possibility of a larger reduction in the 5-year LPR quotation in August, with a reduction of 0.2 to 0.25 percentage points, and a possible reduction of 0.1 percentage points in the 1-year LPR quotation. This will drive a rapid decline in the interest rates of newly issued residential housing loans, release clearer signals of stabilizing the real estate market, reverse market expectations, and promote the real estate industry to achieve a soft landing as soon as possible. This is of great significance for stabilizing growth and preventing risks in the second half of the year.

At the same time, he believed that according to the market-oriented adjustment mechanism of deposit interest rate, the deposit interest rate would be reasonably adjusted by referring to the bond market interest rate represented by the 10-year treasury bond bond yield and the loan market interest rate represented by the one-year LPR. This means that a new round of deposit interest rate reduction may start, driven by the decline of 1-year LPR quotation in June and August and the continuous downward trend of recent 10-year treasury bond bond yield. This will alleviate the downward pressure on the net interest margin of banks, continuously reduce the financing costs of the real economy, and promote banks to quickly lower the interest rates of existing housing loans.