On September 20th, the loan market quoted interest rate (LPR) for September was released. The 1-year LPR is 3.35%, the same as last month; the LPR for 5 years or more is 3.85%, also the same as last month, with no changes in the 1-year and 5-year or more interest rates.

Experts in the industry told reporters from Cailian Press that the main reason for the stable LPR rate in September is that banks are under significant pressure from net interest spread, while the policy rate (7-day reverse repurchase rate) remains unchanged, and there is not a strong urgent need for consecutive rate cuts in the short term to guide the LPR quote to follow suit.

Looking forward, industry insiders believe that after the sharp interest rate cuts by the Federal Reserve, there is more room for flexible adjustment of domestic monetary policy, and the probability of subsequent interest rate cuts and reserve requirement ratio cuts is increasing. The central bank is likely to lower its main policy rate in the fourth quarter, which will guide the LPR quote to follow suit.

The LPR rate remained stable in September, and there is not a strong urgent need for a short-term rate cut.

Regarding the stability of the LPR rate in September, Zhou Maohua, a macro researcher at China Everbright Bank's Financial Market Department, told reporters from Cailian Press that the main reason is that banks are under significant pressure from net interest spread, while the policy rate (7-day reverse repurchase rate) remains unchanged. In February and July of this year, the LPR rate was significantly reduced twice, and commercial banks need some time to evaluate the specific impact and effect of the LPR rate cuts. Currently, banks are under overall pressure from net interest spread.

"At the same time, the anchor rate remains stable." Zhou Maohua further stated that there are certain constraints on the adjustment of deposit interest rates by banks, mainly because deposit rates have declined rapidly in recent years, resulting in a slight decrease in the cost-effectiveness of deposit income compared to other assets. Some banks have experienced deposit outflows, and the expansion speed of bank assets has slowed down. Coupled with the narrowing of net interest spread, banks are facing increased operational pressure.

Zhou Maohua believes that currently banks are under significant pressure from net interest spread, and there are certain constraints on the adjustment of deposit interest rates, so there is a resistance to large-scale short-term reductions in LPR rates and loan rates.

Wang Qing, chief macro analyst at East Money, also believes that there are certain constraints on the current interest rate cut. The net interest margin of banks in the first and second quarters of this year was 1.54%, a decrease of 0.15 percentage points from the fourth quarter of last year, and has clearly fallen below the 1.8% warning level. If the policy interest rate is continuously lowered in the short term and the LPR quote is guided to follow suit, coupled with the large-scale potential for a significant reduction in existing home loan rates, the net interest margin of banks in the second half of the year will face considerable downward pressure, which is not conducive to the stability of bank operations.

Wang Qing also stated that the People's Bank of China lowered the 7-day reverse repurchase rate by 10 basis points in July, and guided both tenor LPR quotes to be lowered by 10 basis points. The current situation is an observation period for the policy effects after the interest rate cut in July. Considering that the overall controllability of the downward pressure on the macroeconomy is manageable and various risks continue to be effectively controlled, there isn't a great urgency for the short-term continuous reduction of policy interest rates and guiding the LPR quote to follow suit.

"The LPR rate remains stable, but the financial support for the real economy remains unchanged. It is expected that the People's Bank of China will continue to comprehensively use pricing, quantity, and structural tools, coordinate well with active fiscal policies, further reduce the financing costs of the real economy, continue to increase support for weak links and key emerging areas of the real economy (focusing on the 'five major tasks'), and do a good job of cross-cyclical adjustments while ensuring the achievement of the annual economic and social development goals," added Zhou Maohua.

The probability of subsequent LPR reductions of more than 5 years following the Fed's interest rate cut is expected to further decrease

Looking ahead, the industry generally believes that after the significant interest rate cut by the Federal Reserve, the flexibility of domestic monetary policy adjustments has increased. The probability of short-term interest rate cuts and reserve requirement ratio cuts in the short term is increasing. "There is still sufficient space for the domestic conventional policy, and as the effects of domestic macroeconomic policies continue to be released, consumption and domestic demand are steadily recovering, the internal circulation of the economy is smooth, market sentiment is gradually warming, and the overall operation of banks is gradually improving. The LPR still has room for a downward adjustment," said Zhou Maohua.

Chen Wenjing, director of market research at China Index Research Institute, stated that in the interpretation of financial statistics data in August, relevant officials of the People's Bank of China stated that they are "taking measures to further reduce the financing costs for enterprises and residents, and maintain reasonable and adequate liquidity." The interest rate cut by the Federal Reserve has provided greater space for the subsequent adjustment of China's monetary policy, and it is expected that the subsequent adjustments to the reserve requirement ratio and interest rate cuts in China will be accelerated, further reducing the financing costs for enterprises and residents. For the real estate market, the LPR of more than 5 years is expected to be further reduced, and the cost of home purchase will also decrease accordingly.

Yan Yuejin, deputy director of the E-House Research Institute, also stated that the interest rate cut by the Federal Reserve has a positive impact on China's loan policies, especially mortgage policies. The probability and magnitude of a cut in the LPR in the 9th month to the end of the year will increase. Under a loose loan policy, the short-term and long-term loan costs will be further reduced. Based on this, the cost of home loans will also be further reduced, helping to lower the cost of home purchases and boost home buying consumption. At the same time, it will help guide further reductions in existing home loan rates.

"Taking into account the current economic situation and price trends, the People's Bank of China is likely to reduce the main policy interest rates in the fourth quarter, that is, the 7-day reverse repurchase rate, with an estimated reduction of 10 to 20 basis points, which will then guide the LPR quote to follow suit," said Wang Qing. In addition, focusing on strengthening coordination with fiscal policies, supporting government bond issuance, there is a possibility of a reserve requirement ratio cut in the fourth quarter. However, in the process of improving the quality of LPR quotes in the future, there is also the possibility that the policy interest rate will remain unchanged, and the LPR quote will be lowered separately.

Dong Ximiao, Chief Researcher of China Fortune Securities, also told the reporter of Caijing that considering internal needs and external changes comprehensively, the People's Bank of China may possibly implement a comprehensive reduction of reserves by 0.25-0.50 percentage points within the year, reduce policy interest rates by 10-20 basis points, drive LPR down simultaneously, and promote a stable and declining overall social financing cost.