November LPR Quotation Released, 1-Year and 5-Year Interest Rates Remain Unchanged - How to Interpret? What Information is Worth Paying Attention to?

Loan Market and Reserve Requirement Reduction Expectations

Just as expected.

The Loan Prime Rate (LPR) is quoted by various banks based on the market operations interest rate (mainly the medium-term lending facility rate) plus a spread. It is calculated by the National Interbank Funding Center and serves as a pricing reference for bank loans. Currently, the LPR includes two maturity varieties: 1-year and 5-year or more. The LPR quoting banks currently consist of 18 banks, including national banks, city commercial banks, rural commercial banks, foreign banks, and private banks.

This month, the interest rate for first-time home loans has been significantly reduced, putting pressure on net interest margins for banks. As a result, banks lack the incentive to lower the LPR quoting spread. Therefore, the market’s expectation was that the LPR rate would remain stable this month.

Overall, the probability of an interest rate cut this year is not very high, while the probability of a reserve requirement reduction is quite high.

Currently, interbank deposit rates and government bond rates are higher than the medium-term lending facility rate. This means that despite the reserve requirement reduction implemented in September, which released over 500 billion yuan of long-term funds, the liquidity level in the banking system is still decreasing. This is also one of the direct reasons affecting the demand for operations. Moreover, 1 trillion yuan of government bonds will be issued in November, with the issuance scheduled to be completed before the year-end. These bonds will be mainly purchased by banks and other financial institutions, consuming a large amount of long-term liquidity. This is also a direct reason for the significant increase in the medium-term lending facility in November.

At the end of October, there was a situation where the overnight interbank lending rate reached as high as 50%. That means some small banks were in desperate need of money and were willing to borrow for one day at an annual interest rate of 50%. The liquidity problem between banks can be imagined.

Monetary policy in the fourth quarter will still be oriented towards easing. The market believes that considering the issuance of 1 trillion yuan of government bonds and the possibility of further promoting special refinancing bonds, coupled with a significant amount of medium-term lending facility expiring, it will have an impact on liquidity. Therefore, there is a high probability of another reserve requirement reduction in the fourth quarter.

According to the published data, the credit structure in China has not improved as expected. Especially, the “deleveraging” of short-term household loans has occurred again. In October, household loans decreased by 34.6 billion yuan, among which short-term loans decreased by 105.3 billion yuan, while medium and long-term loans increased by 70.7 billion yuan. The addition of medium and long-term loans is at one of the lowest levels in recent years, while the decrease in short-term loans reflects weak consumer demand. In addition, according to the latest published CPI data, the year-on-year CPI in October turned negative, and the PMI declined beyond the seasonal decline. This is why many institutions now predict a reserve requirement reduction before the end of the year. The reason why the official previously did not reduce the reserve requirement, even though they should have, is most likely because they needed to achieve their task of stabilizing the renminbi exchange rate. However, now that the expectations of a rate hike by the Federal Reserve have significantly decreased and the renminbi exchange rate has started to recover, reducing the reserve requirement at this time will not have a significant impact on the exchange rate.

Therefore, instead of focusing on interest rate cuts for the rest of the year, it is better to pay attention to when the reserve requirement will be reduced. We can expect to receive more loan marketing calls recently.

Adjustment of Mortgage Interest Rates

Speculating blindly, it may be beneficial for mortgage holders.

Next year’s repayment interest rate will generally be linked to the 5-year LPR in December of this year.

The recent action is that banks have been continuously lowering deposit interest rates, apparently to create more room for the continuous downward movement of loan interest rates.

Based on their behavior last year, they lowered LPR in November but stubbornly refused to lower it further in December; it seems that banks are reluctant to cut that piece of meat.

The situation is much more severe this year, and the unified adjustment of mortgage interest rates can be regarded as banks truly understanding the urgent situation. If they make another cut in December, it will be a real advantage for residents.

Pay close attention to the trend of the 5-year LPR in December, as it is related to personal finances.

Monetary Policy Needs Reform to Avoid Ineffective Traps

During the current downturn in the real estate cycle, it is crucial that we reform the way monetary policy is used, otherwise we will continue to fall into the trap of ineffective monetary policy.

In China, due to the connection between the Loan Prime Rate (LPR) and mortgage loans, and because housing is highly correlated with people’s wealth and livelihood, changes in the LPR have the largest impact on the market. As a result, it has gradually become the benchmark interest rate in our country over the past few years, with other interest rates often following the direction of LPR changes.

However, in reality, using mortgage loan interest rates as the benchmark is not conducive to the development of the real economy. When implementing expansionary or contractionary monetary policy, the usual approach is to start with the benchmark interest rate, as changes in the benchmark interest rate can more quickly influence other interest rates, leading to changes in the same direction.

However, when mortgage loan interest rates become the benchmark, our monetary policy becomes increasingly ineffective. This is because when the central bank wants to adjust interest rates, it must start with the LPR. However, as soon as it starts with the LPR, the market tends to link the target of interest rate adjustments closely to the real estate market. But in reality, the central bank’s goal may only be to influence ordinary deposit and loan interest rates in order to improve consumption and investment.

As a result, the market’s sensitivity to interest rate adjustments decreases. For example, when the LPR rises or falls, people are more concerned about their own housing costs and mortgage repayment costs, as well as whether it is a good time to buy a house. They rarely consider how future investment opportunities or consumption costs may change as a whole.

Therefore, people rarely directly change their investment and consumption prospects due to changes in the LPR, and as a result, the investment and consumption tendencies of society are difficult to immediately change due to changes in monetary policy. There is often a prolonged lag period, causing the goals of stimulating investment and consumption through monetary policy to fall short.

Furthermore, the ineffectiveness of the monetary market further undermines market confidence, making people more conservative in their attitudes towards upcoming positive policies. Regardless of income growth, investment and consumption intentions decrease. This phenomenon, known in macroeconomics as “liquidity preference,” is one of the three main reasons Keynes used to explain the outbreak of economic crises.

Therefore, if we want to promote industrial upgrading and stimulate a new round of investment and consumption, in addition to releasing liquidity, we must also adjust the way monetary policy is used. Specifically, reducing the frequency of adjusting the LPR and bypassing the LPR to increase the frequency of adjusting the Medium-term Lending Facility (MLF), Standing Lending Facility (SLF), and reverse repo rates, will make the market understand that monetary policy is not solely targeting the real estate market.

By bypassing the LPR and increasing the frequency of adjusting other interest rates, we can more intuitively reflect changes in opportunity costs in the investment and consumption sectors. This will increase the safety cushion for investment and consumption, effectively increasing the income of enterprises and residents without significantly increasing the risk of inflation.

Currently, the adjustment of nationwide existing mortgage loan interest rates has been largely completed. In the future, although we will enter an interest rate reduction cycle at an accelerated pace, it is likely that the frequency of adjusting the LPR will be significantly reduced. This will allow for targeted reserve requirement ratio reductions and interest rate reductions in the real economy, in order to promote industrial upgrading, break free from dependence on real estate, and achieve sustainable development.

Analysis of Monetary Policy Outlook

The unchanged LPR is in line with market expectations, and in fact no one expects a rate cut this month.

Currently, October’s CPI is already at -0.2%, which theoretically supports even lower interest rates.

Considering that the interest rate in the United States has been running at a high level of 5.25-5.5%, from the perspective of exchange rate, it does not support further rate cuts.

In October, US inflation reached over 3%, and the renminbi quickly returned to around 7.2. Market expectations for a rate hike by the Federal Reserve in December are not high, and the United States may have already ended its rate hike cycle.

In October, domestic mortgage loan rates for existing borrowers were just lowered, involving 50 million households and a total of 150 million people, with a total amount of about 22 trillion yuan. The average rate reduction was 0.72%, equivalent to saving interest costs of 170 billion yuan per year.

The reduction in mortgage loan rates is essentially a disguised rate cut specifically targeting high-interest borrowers.

Given that there have not been significant changes in the macroeconomy, the optimal strategy for LPR is to remain unchanged.

Starting in October, fiscal policy has also been actively implemented. It not only further reduced tax incentives, but also issued one trillion yuan of national bonds for post-disaster reconstruction by local governments. Local governments also issued over one trillion yuan of special local bonds to alleviate the debt pressure of urban investment.

There is sufficient liquidity in the market, but most of the funds are still stagnant within the banking system or in the hands of state-owned enterprises.

A special mention should be made of the current real estate market, where private enterprises as a whole are unable to obtain sufficient funds. Even with various policy support from the central bank, a principle of equal treatment has been expressed. Even companies like Vanke can be targeted for short selling, indicating that market confidence has basically disappeared. Second-hand housing prices in October continue to decline, including core areas of first-tier cities.

Interest rate cuts: Homebuyers benefit greatly

It is expected that this month’s LPR will remain unchanged.

On the one hand, the LPR for mortgages with a term of more than 5 years is currently 4.2%, and in many cities, the interest rates for first-time homebuyers are as low as 3.8%, which is already a historical low.

On the other hand, the rate cuts implemented since September 25th have already made banks “bleed” by passing on the benefits to borrowers.

Data shows that during the first week of implementation of the interest rate adjustment for existing mortgage loans from September 25th to October 1st this year, 98.5% of eligible first-time homebuyers had their interest rates lowered, with a total of 49.73 million loans and 2.17 trillion yuan. The adjusted weighted average interest rate was 4.27%, with an average decrease of 0.73 percentage points. With the policy on reducing interest rates for existing first-time homebuyers taking effect, the weighted average interest rate for existing housing loans in China at the end of September was 4.29%, which was 42 basis points lower than the previous month, indicating a significant decrease.

The largest beneficiaries of the interest rate cuts for existing mortgage loans are those who bought homes a few years ago when interest rates were high. Calculations show that if the interest rate drops from 5.88% to 3.85%, a 30-year mortgage of 1 million yuan would save nearly half of the interest costs.

Bank net interest margin and deposit liability

First, let’s talk about the viewpoint: it is in line with market expectations. This is mainly because the recently announced MLF interest rate remains stable, which also indicates the market’s anticipation that the banks will maintain the LPR interest rate this month.

Looking at the macroeconomic data announced by the country in October, China’s domestic demand is steadily recovering, and the performance of real economy loans and social financing has exceeded expectations. Credit growth has remained stable and moderate, indicating that loan market interest rates are within a reasonable range, and there is not a high urgency to lower short-term LPR rates.

As for the banks, as of the end of the third quarter, the net interest margin of domestic banks continues to remain below 1.8%, and some banks are under significant pressure in terms of net interest margin. Looking at the trend, short-term bank net interest margins still face certain pressures. On one hand, China is continuing to guide banks and financial institutions to provide more benefits to the real economy. On the other hand, in the bank’s deposit liabilities, the proportion of fixed deposits remains relatively high.

Bank Interest Rate Adjustment Situation

The fact that MLF and reverse repo rates have not changed means that the unchanged LPR is already within everyone’s expectations.

The one-year Loan Prime Rate (LPR) for November is reported at 3.45%, the same as the previous month.

The LPR for terms longer than five years is reported at 4.2%, the same as the previous month.

Both rates remain unchanged.

The key issue is that recently the news often mentions various banks continuously reducing deposit interest rates.

They all say that the interest rate spread of banks is relatively poor, and the loan situation is not good.

Therefore, LPR generally will not be adjusted in the short term, which will not add pressure to the financial system.

On the contrary, news about reserve requirement ratio cuts may come out in the future, which will continue to relieve the pressure on the financial system.

MLF, reverse repo, SLF, and reserve requirement ratio cuts can all alleviate the pressure on the financial system. LPR generally will not be adjusted when the pressure on the financial system is high.

Moreover, banks will not suffer losses. A wave of loan rate cuts will be followed by many waves of deposit rate cuts.

Currently, banks are dealing with the issuance of 1 trillion yuan in government bonds in November and the issuance of many special refinancing bonds by various regions.

This 1 trillion yuan in government bonds will be issued by the end of the year, and banks need to purchase these bonds.

Therefore, the scale of MLF due this month is 850 billion yuan, and the net injection of MLF in November is 600 billion yuan.

The intensity is relatively large, and the purpose is to maintain the ample liquidity of the banking system.

Now, the interbank certificate of deposit rate and the government bond rate have both risen, higher than the MLF rate.

This indicates that the banking system’s demand for medium- and long-term funds has increased.

So, from these situations, it can be seen that MLF will continue to have a relatively large net injection in December.

And there is a high probability that the reserve requirement ratio will be cut, which will be announced soon.

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Large banks have already lowered deposit rates early on, and various rural and small banks are also continuously following suit.

Since late October, many rural commercial banks and village banks have made reductions in one-year, three-year, and five-year deposit rates, with reductions ranging from 10 to 40 basis points.

The one-year rate is 2.15%, down 10 basis points.

The three-year rate is 2.9%, down 20 basis points.

The five-year rate is 2.9%, down 20 basis points.

Everyone is looking forward to a reduction in loan rates and mortgage rates. Banks are also complaining every day, saying that they cannot make money.

All of this indicates that LPR is unlikely to change in the short term.

After the 1 trillion yuan government bond issuance is completed and the reserve requirement ratio cut is implemented, let’s see if LPR will continue to be lowered next year to stimulate the economy.