On December 9, the Central Political Bureau of the Communist Party of China held a meeting. The meeting pointed out that next year, a more proactive fiscal policy and moderately relaxed monetary policy should be implemented, strengthening extraordinary counter-cyclical regulation. This is also the first time since 2011 that the tone of monetary policy has shifted from 'prudent' to 'moderately relaxed.'

In the view of market participants, the shift in monetary policy will help boost market confidence and change the current situation where market expectations are generally weak. Many market participants believe that the 5-year and above LPR quotes will be further lowered, although the predicted range varies, between 20bp to 60bp.

The shift in monetary policy has triggered expectations for LPR reduction.

Zhou Maohua, a macro researcher at China Everbright Bank's financial market department, told the reporter that the domestic economy is currently in a recovery phase, with signs of stabilization and recovery in the real estate market, but there is insufficient effective demand. To coordinate with the implementation of proactive fiscal policies, it is expected that monetary policy will be moderately relaxed, with increased efforts in economic counter-cyclical regulation. It is not ruled out that further use of tools such as reserve requirement ratio cuts and interest rate reductions will open up space for further LPR reductions.

Wang Qing, chief macro analyst at Dongfang Jincheng, stated that the current price level remains persistently low, with insufficient effective demand. In 2025, the demand for counter-cyclical regulation will increase, prompting the central bank's monetary policy tone to shift. In 2025, the central bank will continue to implement significant interest rate cuts and reserve requirement ratio reductions, with the possible policy rate cut reaching 0.5 percentage points, notably higher than this year's 0.3 percentage points cut. Additionally, interest rates for various structural monetary policy tools will also be adjusted in a timely manner to guide down the financing costs for enterprises and residents.

It cannot be ruled out that in 2025, through significant guidance in lowering the 5-year and above LPR quotes, a considerable targeted interest rate reduction for residential mortgages may continue to be implemented. This is a key move to promote the stabilization and recovery of the real estate market.

Lian Ping, chief economist of Guangkai's chief industry research institute, pointed out in September this year that there is a clear gap between the 'prudent' monetary policy tone and market psychological expectations. Compared to the continuous interest rate cuts in Europe and the USA, which often range from 25 to 50 basis points, and even a single highest reduction of 100 basis points, the adjustment range of domestic LPR shows a significant gap with market expectations, and slight rate cuts are unlikely to have a noticeable impact on the market.

Since 2023, the People's Bank has adjusted the LPR quote multiple times, but each adjustment has mostly been within 25bp. In 2024, the loan market quote rate (LPR) underwent three rounds of adjustments. Among them, in February, the People's Bank implemented an "asymmetrical interest rate cut", lowering the LPR for periods over 5 years by 25bp. In July and October, the 1-year and over 5-year LPR quotes were both reduced, with a consistent adjustment pace of 10bp and 25bp respectively.

Experts suggest that the LPR rate for periods over 5 years may be reduced separately, with a magnitude of over 20bp.

Many analysts believe there is room for a reduction in the LPR rate for periods over 5 years in 2025, and that it may be lowered separately.

Tao Chuan, chief economist of Minsheng Securities, predicts in a research report that in the first quarter of 2025, reserve requirement cuts might become a normalized hedging tool under exchange rate pressure, while the 7-day reverse repo rate remains stable. However, considering that real estate demand still needs to be stimulated, the LPR rate for periods over 5 years may be reduced by 20-25bp. As the exchange rate target is recalibrated to respond to increased tariffs, there might be approximately a 40bp space for cuts in the 7-day reverse repo rate in the second quarter and beyond.

The Bank of China's macro analysis today also pointed out that the People's Bank will make decisions on interest rate cuts based on conditions, increase support for the real economy, and reduce the comprehensive financing costs of society. The cumulative reduction in policy interest rates for the whole year may reach 20bp, guiding the 5-year LPR to decline by 40bp to 60bp.

Xu Liang, chief analyst of fixed income at Hua Fu Securities Research Institute, stated that looking ahead to 2025, stabilizing growth remains the primary goal, and if the economy performs below expectations, interest rate cuts could still be implemented. The LPR may still have a reduction space of 20-30bp, which is expected to further drive a rebound in consumer activity.

Editor/Lambor