What signal?, Unexpectedly! Loan interest rate remains unchanged for LPR over five years | interest rate | signal

On the 21st, the National Interbank Funding Center announced the market quoted interest rates for this month's loans. Among them, the 1-year LPR is 3.45%, a decrease of 10 basis points, and the 5-year and above LPR is 4.20%, remaining unchanged.

This month's LPR showed an asymmetric decline, especially for LPR over 5 years without change. Industry insiders believe that keeping the LPR unchanged over a period of 5 years can help commercial banks stabilize their interest rate spreads. In addition, experts predict that the adjustment plan for the interest rates of existing housing loans with high interest rates will be accelerated.

Why does LPR remain unchanged over a five-year period?

On August 15th, the central bank unexpectedly lowered interest rates, lowering the 7-day reverse repurchase rate by 10 basis points to 1.80; The one-year MLF interest rate has been lowered by 15 basis points to 2.5. Due to the fact that LPR is formed by adding points on the basis of MLF interest rates in a market-oriented manner, the market generally expects that LPR with a maturity of over 5 years this month is likely to decrease with MLF.

Tianfeng Securities had previously predicted that there may be an asymmetric reduction in LPR quotations this month, and the reduction in LPR for more than 5 years may exceed 15 basis points.

The Chief Economist of CITIC Securities also predicted that there is a 15 basis point downward potential for 1-year LPR and 5-year and above LPR.

However, the LPR over a period of 5 years did not decrease as expected. Dong Ximiao, Chief Researcher of Zhaopin, pointed out in an interview with China News Service that from a time perspective, this is the second decline in the one-year LPR in three months after the LPR fell by 10 basis points in June, conveying a clear signal that monetary policy will increase countercyclical regulation and help accelerate economic recovery.

On August 18th, the financial regulatory authorities jointly held a meeting to study and deploy work related to financial support for the development of the real economy and prevention and resolution of financial risks, requiring "comprehensive consideration of the price relationship between increment, stock, and other financial products.".

In Dong Ximiao's view, this requires financial institutions to pay attention to the price difference between existing and incremental products, as well as between different institutional products. Among them, commercial banks should face the problem of excessive interest rate differences between existing and new housing loans. After multiple statements from the financial management department, it is expected that the adjustment plan for the interest rate of existing housing loans with high interest rates will be accelerated. In this situation, keeping the LPR unchanged for a period of more than 5 years helps commercial banks stabilize interest rate spreads, maintain reasonable profit growth, and enhance the sustainability of supporting the real economy and the robustness of high-quality development.

Wang Qing, Chief Macro Analyst of Dongfang Jincheng, stated that the policy interest rate cut was implemented in August, but the results of the 1-year and 5-year LPR price adjustments in that month exceeded market expectations. In the future, separate measures may be introduced to "adjust and optimize real estate credit policies".

Wang Qing pointed out that the one-year LPR quotation has been lowered by 0.1 percentage points, lower than the decrease in MLF interest rates on August 15th. Its judgment may be due to the need to maintain a reasonable level of bank net interest margin in the process of guiding enterprises and residents to steadily reduce financing costs, which is conducive to enhancing the sustainability of commercial banks supporting the real economy.

Wang Qing further pointed out that keeping the LPR quotes for more than 5 years in August steady may mean that specific measures will be separately introduced in the later stage to "adjust and optimize real estate credit policies", which may include greater efforts to implement a dynamic adjustment mechanism for the first home loan interest rate policy, as well as lowering the lower limit of the second home loan interest rate. Overall, the next step is to guide the downward trend of interest rates for newly issued residential mortgages.

"This 5-year period has not been lowered, slightly different from market expectations, but it does not affect the progress of existing efforts to reduce housing loans." Yan Yuejin, Research Director of E-House Research Institute, told China News Service that before the release of this data, the central bank and three other departments held a video conference to clarify the optimization and adjustment of real estate credit policies. This indicates that loose mortgage policies are still the main direction, and there will still be positive actions in various regions, including lowering mortgage interest rates. Both incremental and existing loans are likely to be further downgraded.

Wen Bin, Chief Economist of China Minsheng Bank, stated that in the current environment where new loan interest rates have dropped to historic lows, there is ample room for local policies, and bank interest rate differentials continue to be under pressure, in order to maintain a reasonable profit level for banks, keeping LPR quotes for loans over 5 years unchanged can reserve space for accelerating the landing of existing housing loan interest rates.

Will LPR continue to decline in the future? Dong Ximiao believes that the next step is for the central bank to moderately lower policy interest rates, implement reserve requirement cuts in a timely manner, and continue to provide low-cost funds for banks; Commercial banks should make good use of the market-oriented adjustment mechanism for deposit interest rates, orderly reduce deposit interest rates, continuously reduce debt costs, continue to promote the downward trend of LPR, especially for LPR with a term of more than 5 years, promote the stable and moderate reduction of financing costs in the real economy, and provide better support and services for promoting consumption, stabilizing investment, and expanding domestic demand.

When will the interest rate of existing housing loans be adjusted?

Recently, the adjustment of interest rates on existing housing loans has become the most concerning topic for the public.

On July 14th, Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, stated that the interest rates on existing housing loans issued in previous years were still at a relatively high level. "In accordance with the principles of marketization and rule of law, we support and encourage commercial banks and borrowers to independently negotiate changes to contract agreements, or to issue new loans to replace the original existing loans." This is the first time that regulatory authorities have made a statement on the adjustment of interest rates on existing housing loans.

On August 1st, the People's Bank of China and the State Administration of Foreign Exchange proposed at the second half of the year work meeting to guide commercial banks to adjust the interest rates of existing personal housing loans in an orderly manner in accordance with the law. This is the second time in the past month that the central bank has made a statement regarding the adjustment of interest rates on existing housing loans.

"The interest rates of new homebuyers are significantly lower than those of existing home loans, because the current first home loan interest rates in cities are basically reduced by points on the basis of LPR, while the existing home loan interest rates are basically formed by adding points on the basis of LPR, resulting in a large interest rate difference between new and existing home loans. Therefore, after the LPR is lowered, new homebuyers can clearly enjoy lower loan interest rates." Chen Xiao, senior analyst at Zhuge Data Research Center, told Zhongxin Jingwei.

According to monitoring data from Beike Research Institute, in July 2023, the average mainstream mortgage interest rate for the first home in Baicheng was 3.90%, and the average mainstream mortgage interest rate for the second home was 4.81%, both of which decreased by 10BP compared to the previous month. The difference in interest rates for the first and second home loans reached 91BP.

However, banks have not taken any substantial action in adjusting the interest rates of existing housing loans recently. According to recently released data, the phenomenon of early repayment of loans may still be ongoing. On August 11th, the latest data released by the central bank showed that household loans decreased by 2007 billion yuan in July, including a decrease of 133.5 billion yuan in short-term loans and a decrease of 67.2 billion yuan in medium - and long-term loans mainly for personal housing loans. At the same time, RMB deposits decreased by 1.12 trillion yuan in July, of which household deposits decreased by 809.3 billion yuan.

"The reduction of interest rates on existing housing loans is expected to be implemented quickly." Wang Qing believes that it is imperative to lower the interest rates on existing housing loans in the second half of the year, and the key now is the magnitude of the reduction. Based on the downward adjustment ratio in 2008 and the current interest rate spread between new and old mortgage loans, it is estimated that it will be around 0.5 to 1 percentage point. For the losses incurred by banks in terms of interest, they can be partially compensated by guiding them to moderately reduce deposit interest rates, and now they also have such conditions.

Dong Ximiao pointed out that for some existing mortgage loans with high interest rates, it is recommended that the central bank strengthen its guidance and guidance to commercial banks, and promote the head office of commercial banks to formulate a phased adjustment plan for existing mortgage interest rates as soon as possible. Through differentiated interest rate discounts or reduced markup, the existing mortgage interest rates can be directly lowered. The interest rate adjustment plan for existing housing loans can vary for different regions and borrowers. Various regions can establish a self regulatory mechanism for pricing market interest rates and agree on the overall principles for adjusting the interest rates of existing housing loans in their respective regions. At the same time, explore the introduction of loan replacement plans, allowing borrowers with a certain repayment period to apply for new loans to replace old loans, or allowing borrowers to change loan terms, repayment methods, etc. Local governments that meet the conditions can also increase support for borrowers to convert commercial housing loans into provident fund loans, in order to further reduce the interest rate of existing housing loans.