On December 20, the Financial Association reported (Journalist Gao Ping) that today, the People's Bank of China authorized the National Interbank Lending Center to announce that the loan market quotation rate (LPR) for December 2024 is: 1-year LPR is 3.1%, and 5-year and above LPR is 3.6%, with both term LPR Quotes unchanged from the previous month.

Several industry insiders analyzed for the Financial Association that the unchanged LPR in December meets market expectations. The main reason is that the 7-day reverse repurchase rate anchor remains stable, and banks continue to face certain net interest margin pressure. Although interbank certificate of deposit yields have significantly declined since December, the quoting banks still lack the incentive to lower the LPR Quote's premium. Looking ahead, insiders believe that there is a possibility of implementing a significant targeted interest rate cut on residential mortgages in 2025 by guiding the 5-year and above LPR Quotes downwards considerably.

Balancing the internal and external policy environment, the unchanged LPR Quote in December meets market expectations.

Several industry insiders analyzed that the unchanged LPR Quote in December conforms to market expectations. Zhou Maohua, a macro researcher at the Financial Markets Department of China Everbright Bank, stated in an interview with the Financial Association that this month's LPR rate remains stable, mainly because the 7-day reverse repurchase policy rate remains stable and some banks' net interest margin protection is thin.

CITIC SEC's chief economist Mingming also stated that after the 1-year and 5-year LPR Quotes were respectively lowered by 25 bps in October, the quotes remained steady in November and December. On one hand, the reverse repurchase rate in December was not lowered, and under the significant pressure on commercial banks' interest margins, there was insufficient incentive to actively reduce the LPR and reverse repurchase rate's premium. On the other hand, although the Federal Reserve reduced interest rates by 25 bps in December, the overall rhetoric regarding future rate cut space remains hawkish; considering the current high exchange rate risk between China and the U.S., this time the LPR Quote not being lowered may also balance the internal and external policy environment, achieving a balance between stabilizing the exchange rate and broadening monetary goals.

Regarding the unchanged LPR Quote in December, Wang Qing, chief macro analyst at Dongfang Jincheng, also analyzed that on one hand, as the pricing basis for the LPR Quote, this month's policy rate, which is the central bank's 7-day reverse repurchase rate, remains stable, indicating heavily that the LPR Quote in December will stay unchanged.

On the other hand, the LPR Quote in October followed the policy rate's reduction of 20 basis points in September, which was a significant cut; coupled with the fact that the current bank net interest margin is at a historical low, despite the fact that interbank deposit yields have significantly declined since December, quoting banks still lack the motivation to lower the LPR Quote's premium," Wang Qing stated.

Wang Qing believes that the recent policy interest rates and LPR Quotes remain unchanged, primarily due to the rise in economic prosperity since October following the introduction of a package of incremental policies. The official manufacturing PMI Index has been continuously in the expansion Range for October and November, and macroeconomic Indicators from both supply and demand sides have generally improved, with the real estate market also showing significant signs of recovery. Currently, it has entered a period for observing policy effects, focusing on transmitting the effects of previous "strong" policy interest rate cuts and significant adjustments in October LPR Quotes to the real economy, guiding enterprises and residents to lower financing costs, stimulating investment and Consumer momentum, and stabilizing the downturn in the real estate market.

In 2025, policy interest rates are expected to be lowered, guiding LPR Quotes to adjust accordingly.

Looking ahead, the industry believes there may still be room for LPR reductions. Mingming indicated that looking forward, the December Central Political Bureau meeting and the 2025 Central Economic Work Conference will set the tone for the next stage of monetary policy as "appropriately accommodative," while also mentioning "timely interest rate cuts and reserve requirement ratio reductions." This shows that the central bank's stance on expanding money supply remains clear, and there may be further room for LPR to adjust alongside the reduction in reverse repurchase rates. Furthermore, the current loan structure shows that loans below LPR with reduced points account for as high as 43.33%, and under the demand to optimize LPR Quote quality, unilateral downward adjustments of LPR may also have substantial room.

Zhou Maohua also stated that recently, domestic monetary policy has shifted from being stable to moderately accommodative. The central bank will guide the central market interest rates to further decline through tools like reserve requirement ratio cuts and interest rate cuts, which will create conditions for Banks to reprice their liabilities for deposits and further reduce LPR rates.

Wang Qing determines that focusing on encouraging Banks to increase credit issuance, continuing to support government bond issuance, and continuously releasing steady growth signals, the central bank is likely to cut the reserve requirement ratio by 0.25 to 0.5 percentage points by the end of the year, releasing between 5000 to 1 trillion yuan. This would also accommodate the liquidity arrangements for the Spring Festival.

Additionally, Wang Qing mentioned that the December Central Political Bureau meeting and the Central Economic Work Conference will shift the tone of monetary policy from "stable" to "moderately accommodative," marking the first such adjustment in nearly 14 years, signaling a significant increase in counter-cyclical adjustment efforts. In the process of this monetary policy shift, support from the financial system for the real economy will reflect as "increased volume and decreased prices." Before the end of the year, Banks will increase the scale of new loans issued to the real economy, especially accelerating the disbursement progress of loans for real estate "white list" projects, where there is also room for lowering loan rates for enterprises and residents.

Looking ahead to 2025, Wang Qing further stated that under the moderately accommodative monetary policy stance, the central bank will continue to implement substantial interest rate cuts, with policy interest rates expected to be lowered by 0.5 percentage points, significantly higher than the 0.3 percentage points decrease this year, which will guide LPR Quotes to follow suit.

Furthermore, Wang Qing mentioned that next year, interest rates for various structural monetary policy tools, such as re-lending for agricultural support and small businesses, technology innovation, technical transformation re-lending, and supportive housing re-lending, will also be adjusted downward in a timely manner to effectively increase support for key areas and weak links of the national economy, promoting a comprehensive decline in financing costs for enterprises and residents. There is also the possibility that in 2025, through significant guidance for the downward adjustment of LPR Quotes for terms longer than five years, there could be a continued substantial targeted interest rate reduction for residential mortgages, which is crucial to stabilize the real estate market.

Editor/lambor