LPR is the main reference benchmark for loan pricing. After considering the 10 basis points cut in the open market 7-day reverse repo operation rate (referred to as "7-day reverse repo rate") on July 22nd, LPR responded quickly and adjusted accordingly on the same day, indicating that the LPR quote turns to a more short-term monetary policy interest rate reference. In recent times, 7-day reverse repo rates have not been adjusted, so the market has long expected that this month's LPR quote will remain the same.

LPR quote remains unchanged

After the 1-year and 5-year LPR quotes were cut by 10 basis points on July 22, this month's LPR quote did not adjust.

Since the beginning of this year, the central bank has continuously improved the market-oriented interest rate formation and transmission mechanism, released the effectiveness of LPR reform, and promoted the stability of loan interest rates with a downward trend. After guiding the 5-year LPR to decline by 0.25 percentage points in February, the central bank further guided the 1-year and 5-year LPR to both fall by 0.1 percentage points in July, promoting a reduction in the actual loan interest rate level. The weighted average interest rate on corporate loans in June was 3.63%, a year-on-year decrease of 0.32 percentage points, which is already at a historic low.

"After last month's LPR quote cut, the current focus is on guiding corporate and household credit interest rates to follow suit and cut." Wang Qing, chief macro analyst at China Eastern Securities, told reporters that considering that the overall macroeconomic situation is currently showing signs of recovery, all kinds of risks are effectively controlled, and monetary policy has conditions to adhere to a prudent tone, It is not necessary to continuously cut policy interest rates and guide LPR quotes to follow suit.

The Governor of the People's Bank of China, Pan Gongsheng, recently pointed out that we should flexibly use policy tools such as interest rates and deposit reserve ratios, while maintaining policy stability and avoiding excessive ease. The "Report on the Implementation of China's Monetary Policy in the Second Quarter of 2024" recently released by the central bank also pointed out that a prudent monetary policy should enhance the consistency of macroeconomic policy orientation, strengthen countercyclical adjustments, and enhance the continuous recovery trend of the economy. Maintain reasonable growth of financing and total money supply.

Wang Qing believes that in the current environment of increasing external uncertainties, insufficient effective domestic demand, low price levels, and painful transition of old and new kinetic energy, the next step of monetary policy will continue to exert more efforts in stabilizing growth and be more powerful. In terms of specific operations, after the central bank launched the "combination of punches" to cut interest rates in July, in order to cooperate with subsequent government bond issuance, better support a proactive fiscal policy, and promote the stability and reduction of corporate financing and household credit costs, monetary policy will maintain flexibility, reserve reductions and interest rate cuts are still available, and various incremental policy reserves are in the policy toolbox.

LPR quotes now refer more to short-term policy interest rates.

Previously, due to the inadequate transmission mechanism from short-term policy interest rates to credit market interest rates, LPR mainly referred to the medium-term lending facility (MLF) rate, which was the mid-term policy rate at that time, and took into account factors such as funding costs and market risk premiums.

With the continuous deepening of interest rate marketization reform, the pricing ability of commercial banks has further improved, and the market-oriented interest rate formation mechanism has become more effective. The reference role of the MLF rate on LPR has declined. At the same time, some quoting banks have quoted LPR higher, and there have been significant deviations from their best customer loan interest rates, which to some extent affect the quality of quotes.

Previously, Pan Gongsheng, Governor of the People's Bank of China, proposed at the Lujiazui Forum that "for some quoted interest rates that are significantly deviated from the actual best customer interest rates, we should focus on improving the quality of LPR quotes and more truly reflect the level of loan market interest rates", and the LPR cut on July 22 Reflecting that some quoting banks have corrected the deviation between the quote and the best customer loan interest rate by lowering the quote.

At present, the central bank has clearly identified the 7-day reverse repo rate as the main policy rate, and the mid-term policy rate is gradually fading out. The MLF due on August 15 will be renewed on August 26 and arranged after the LPR quote, once again reflecting the central bank's intention to dilute the policy color of the MLF rate, indicating that the change in bid rate does not have a policy signal meaning. The LPR quote in July followed the 7-day reverse repo rate, indicating that the LPR quote turned to refer more to short-term policy interest rates.

Editor/Emily