On June 19, the Governor of the People's Bank of China, Pan Gongsheng, said at the 2024 Lujiazui Forum that in the future, a short-term operation interest rate of the central bank may be clearly defined as the primary policy rate. The interest rates of other-term monetary policy tools can dilute the color of policy interest rates and gradually straighten out the conduction from short to long. At the same time, we should continuously reform and improve the loan market quoted interest rate (LPR), focus on improving the quality of LPR quotation, and truly reflect the level of loan market interest rates, particularly for problems where certain quoted interest rates deviate significantly from the actual best customer interest rates.

At the same time, the central bank emphasized the "interest rates of other-term monetary policy tools" and "LPR quotation", which aroused discussions in the market about the way and trend of LPR quotation.

In the industry's view, "interest rates of other-term monetary policy tools" refer to the MLF rate. At present, LPR quotation is still "MLF rate + point", and MLF rate, as the anchored rate of LPR quotation, will directly and effectively affect LPR with its changes. So after the statement of the Governor of the Central Bank, will LPR quotation be lowered separately without changing the MLF operation rate in the future?

Multiple analysts believe that LPR quotation is likely to decline in the third quarter.

Wen Bin, the chief economist of Minsheng Bank, believes that since April, banks have pushed down the cost of liabilities and eased the pressure on the liabilities side caused by continued high costs of public deposits and deposit regularization by suspending "manual rate hikes", stopping the sale of smart notice deposits, small and medium-sized banks follow suit to reduce deposit interest rates and so on. Meanwhile, to reduce financing costs and maintain the stability of bank net interest margins, deposit interest rates still need to be further lowered, and the earliest possibility is to be implemented in the middle and third quarters, which will open up a certain space for subsequent LPR quotation to go down. The window is expected to open in the third quarter.

"In the future, in addition to lowering the MLF operation rate, there is also a possibility of separately lowering LPR quotation. That is to say, with the MLF operation rate unchanged, banks can push down the LPR quotation by reducing the cost of funds and other means, and then separately lower the LPR quotation," said Wang Qing, Chief Macro Analyst of Orient Securities.

Some market experts also agree with this, saying that "LPR quotation itself does not necessarily have to be linked to or refer to the MLF rate." Basically, LPR is the loan interest rate that financial institutions offer to the most favorable customers. In theory, financial institutions can form the loan interest rate of the most favorable customers based on a variety of factors such as the cost of funds and the level of risk, and then form the LPR quotation based on a certain formula.

"There is a basis for separately lowering LPR quotation." Zhou Maohua, a macro researcher in the financial market department of Everbright Bank, told Caixin reporters that from the perspective of policy flexibility, the central bank can, through reserve requirement ratio cuts, structural tools, banks making full use of the deposit interest rate marketization adjustment mechanism according to market conditions, tapping the potential of LPR reform, optimizing the asset-liability structure of banks, and expanding the space for banks to benefit further from the real economy. At the same time, this can also better balance internal and external balance. Taken together, there is a certain basis for the separate lowering of LPR quotation.

"There is a possibility of separately lowering the LPR quotation." Zhou Maohua, a macro researcher in the financial market department of Everbright Bank, told Caixin reporters that from the perspective of policy flexibility, the central bank can, through reserve requirement ratio cuts, structural tools, banks making full use of the deposit interest rate marketization adjustment mechanism according to market conditions, tapping the potential of LPR reform, optimizing the asset-liability structure of banks, and expanding the space for banks to benefit further from the real economy. At the same time, this can also better balance internal and external balance. Taken together, there is a certain basis for the separate lowering of LPR quotation.

Wind data shows that in recent years, the MLF rate and the LPR rate generally have a positive relationship, but there have also been many exceptions. In February of this year, the 5-year LPR quotation fell by as much as 25 basis points without changing the MLF rate. In May 2022, the 5-year LPR quotation fell by as much as 15 basis points without changing the MLF rate. In December 2021, the 1-year LPR quotation fell by 5 basis points without changing the MLF rate.

"It is not ruled out that the probability of separately lowering LPR quotation will be driven by the regulatory authorities' suspension of 'manual interest compensation' and other factors that lower bank deposit costs." Wang Qing predicts that the suspension of "manual rate hikes" by regulators will govern the sinking of funds, which will have a positive impact on the subsequent separate lowering of LPR quotations. In addition, the financial "squeeze water" will cause the credit market supply and demand balance situation itself is an important factor affecting the LPR quotation.

However, Zhou Maohua also warned that this does not mean that the link between the MLF and LPR rates will be immediately weakened. At present, the LPR rate reform has achieved significant results, and policy transmission is unimpeded. However, in the long run, the LPR rate needs to be more market-oriented, fully reflecting banks' own liabilities, market supply and demand, credit risk premiums, etc., and enabling the loan interest rate benchmark to reflect the market resource allocation more fully.