Finance Association, July 22 (Reporter Gao Ping) LPR interest rates for the July 1 term and 5 years or more have now been adjusted. According to the latest loan market quoted interest rate (LPR) released by the People's Bank of China today, the 1-year LPR was 3.35%, compared to 3.45% last month; the LPR for a term of 5 years or more was 3.85%, compared to 3.95% last month. In July, LPR interest rates for the 1-year term and 5-year term and above were cut by 10 basis points.

Industry experts told the Financial Federation reporter that LPR is the main reference benchmark for loan interest rate pricing. The decline in LPR sends a policy signal of steady growth and development, which is conducive to stabilizing market expectations, and will drive a further steady decline in financing costs in the real economy, stimulate credit demand, and promote corporate investment. At the same time, the decline in LPR with a term of 5 years or more is conducive to reducing the interest burden on mortgage borrowers and boosting consumption.

Industry insiders analyzed that based on current mainstream mortgage interest rates in various regions, the “LPR-75BP” pricing formula, the mainstream interest rate for the first home in the past was 3.2%, but now it will drop to 3.1%. According to the repayment method of 1 million loan principal and 30 years of equal principal and interest, the total mortgage interest will be reduced by nearly 0.02 million yuan, and the monthly payment will be reduced by 55 yuan.

LPR for 1 year and 5 years or more was lowered by 10BP; LPR quotation quality continued to improve

In July, while MLF operating interest rates remained unchanged, the LPR quotes for the two term varieties followed a simultaneous reduction of 0.1 percentage points in 7-day reverse repurchase interest rates. In fact, with regard to the July LPR, market participants previously generally judged that the possibility of a separate reduction was not low.

The chief economist of CITIC Securities clearly stated earlier that, with reference to overseas experience and recent policy statements, the LPR quotation mechanism may be improved, thereby improving policy efficiency and the degree of marketization. LPR quotes are also expected to be lowered in the short term, creating more suitable policy conditions for credit recovery. As the LPR reform progresses and financing costs continue to decline, it is expected that loan investment potential will be further unleashed. Although short-term growth is difficult to rebound sharply, the overall structure is optimized, and the quality and efficiency of financial service entities will also improve.

The China Galaxy Securities macro research team previously believed that the LPR reduction in July may be based on three reasons. First, the current LPR price deviates significantly from the actual best customer interest rate, and the quality of the quotation needs to be improved. About 40% of financial institution loans at the end of March were implemented LPR deductions, compared to only 15.55% in August 2019. At the Lujiazui Forum, the central bank emphasized “continuing to reform and improve the loan market quoted interest rate (LPR). In response to the problem that some quoted interest rates deviate significantly from the actual best customer interest rate, the focus is on improving the quality of LPR quotes and more truly reflecting the interest rate level in the loan market”;

The second is to combine factors such as bank capital costs, risk premiums, and supply-demand relationships. Currently, there is room for reduction in LPR quotes. A ban on “manual interest payments” began in April. Bank capital costs may decline in the second quarter, pressure on net interest spreads may ease, etc. Third, real interest rates are currently too high. Further cuts are needed to promote economic growth, and the need for a reduction is increasing.

Authoritative experts pointed out that in recent years, financial support for the real economy has continued to increase, and the decline in loan interest rates is greater than the decline in LPR. In particular, interest rates on loans from the best quality customers have dropped even more, leading to a certain deviation between LPR quotes and interest rates on loans from the best quality customers. President Pan Gongsheng proposed at the Lujiazui Forum that “in response to the problem that some quoted interest rates deviate significantly from the actual interest rates of the highest quality customers, the focus is on improving the quality of LPR quotes and more truthfully reflecting the interest rate level in the loan market.” The current decline in LPR also reflects that some quoting banks have corrected the deviation between the quotes and the best customer loan interest rates by lowering their quotes, and the quality of LPR quotes continues to improve. At the same time, the decline in LPR is in line with the needs of the current economic and financial situation, which is conducive to supporting the continued upward trend of the economy.

The interest burden on mortgage borrowers has been further reduced, and LPR with a term of 5 years or more has dropped by a cumulative total of 35 BP this year

As LPR for a term of 5 years or more is lowered in July, interest rates on mortgages will also fall. Industry insiders said that the decline in LPR with a term of 5 years or more will help reduce the interest burden on mortgage borrowers and promote consumption.

On May 17, the People's Bank of China lifted the lower limit of the national mortgage interest rate policy, and interest rates on newly issued mortgages declined markedly. In June, the national average interest rate for newly issued mortgages was 3.45%, down 66 basis points year on year and 17 basis points month on month, which is the lowest level in history. Industry insiders pointed out that since this year, LPR with a term of 5 years or more has dropped by a total of 35 basis points. After the next repricing date, existing mortgage borrowers will also enjoy the benefits of the reduction in LPR, reduce interest burdens, and enhance spending capacity. Based on the mortgage principal amount of 1 million yuan, a 30-year term, and equal principal and interest estimates, the monthly interest expenses can be saved about 200 yuan, and the total amount of interest can be saved more than 0.07 million yuan.

Yan Yuejin, research director of the Yiju Research Institute, also said that the current interest rate cut is a “double drop,” that is, both 1-year and 5-year LPR have been reduced, which fully indicates that the interest rate cut is comprehensive. This has a positive effect on the use of funds in the short to medium to long term. The current 5-year LPR interest rate cut will help further reduce mortgage costs. Judging from the LPR trend, Yan Yuejin further stated that the first quarter of this year showed a “breaking 4” trend, that is, a decline from 4.2% to 3.95%. However, interest rates have now been cut for the second time this year, further leading to a reduction in costs such as mortgages.

Yan Yuejin said that using the current mainstream mortgage interest rate in various regions, the “LPR-75BP” pricing formula, the mainstream interest rate for the first home in the past was 3.2%, but now it will drop to 3.1%. According to the repayment method of 1 million loan principal and 30 years of equal principal and interest, the total mortgage interest will be reduced by nearly 0.02 million yuan, and the monthly payment will be reduced by 55 yuan.

The impact of the decline in LPR on banks' net interest spreads is manageable

Authoritative experts pointed out that after the correction of illegal manual interest payments, banks' capital costs have steadily declined, and the impact of the decline in LPR on banks' net interest spreads is manageable. Industry insiders analyzed that the decline in LPR this month was partly due to the effects of the regulatory authorities rectifying illegal manual interest payments in the early stages, and bank capital costs were reduced ahead of schedule. According to information, interest expenses saved by banks in the short term after rectifying illegal manual interest payments are close to the effect of lowering deposit interest rates once. Furthermore, after deposit interest rates are lowered, stock deposits will only be gradually repriced at maturity. The effects are gradual, while the reduction in interest expenses caused by manual interest payments due to rectification of illegal manual interest payments was immediate. A number of national banks reported that after the rectification of illegal manual interest payments, their interest rate on deposits in June, especially interest rate payments on public deposits, has declined markedly compared to April, and the net interest spread has rebounded.

“Therefore, it is expected that the impact of this decline in LPR on banks' net interest spreads and bank profits will be manageable, and the impact on shareholders' equity of listed banks will also be small.” Industry experts said that the effectiveness of the market-based adjustment mechanism for deposit interest rates continues to be unleashed. It is expected that banks will adjust the deposit interest rate level reasonably according to changes in market interest rates, which is also conducive to the stabilization of net interest spreads.

It is worth mentioning that starting today, the LPR release time will be adjusted from 9:15 a.m. on the 20th of every month to 9:00 a.m. Experts pointed out that the advance release time of the LPR can be better linked to the operating time of the financial market. There are differences in the opening times of various financial markets. For example, the money market, bond market, and interest rate swap market start trading at 9 o'clock, while the stock market and treasury bond futures market start trading at 9:30. Before the market opens, various financial market participants often formulate trading strategies and plans based on the latest economic and financial data of the day. As an important reference for loan interest rate pricing, LPR was released as early as 9 o'clock, which can be better linked to the operating time of various financial markets, which helps different financial market participants to obtain information on an equal basis and carry out transactions fairly.

Looking ahead, Wang Qing, chief macro analyst at Dongfang Jincheng, said that the July LPR price reduction will drive corporate loan interest rates and residential mortgage interest rates to decline further in the third quarter. This will effectively reduce financing costs for the real economy and expand domestic demand. At the same time, according to the market-based adjustment mechanism for deposit interest rates, bank deposit interest rates must be linked to 1-year LPR quotes and 10-year treasury bond yields, which means that bank deposit interest rates will fully launch a new round of cuts in the future. This will help stabilize the bank's net interest spread. It is expected that after the July reduction, LPR prices will remain stable in the short term. Depending on the economy and price performance in the fourth quarter, there is still some room for LPR prices to be lowered.