The market-oriented adjustment mechanism of deposit interest rate promoted the decline of the cost of medium and long-term liabilities of banks, and promoted the phenomenon that the one-year period did not fall for the first time since the reform, but the five-year period fell by 15bp at one stroke and crossed three steps at a time, far exceeding the market expectation. After adjustment this month, the 1-year and 5-year LPR are 3.7% and 4.45% respectively. The interest margin between 5-year and 1-year LPR returns to the level of the second quarter of 2020 before the promulgation of the three red lines. The 15 BP decrease in the five-year LPR this month is a concentrated reflection of the previous measures such as the central bank’s RRR reduction and the adjustment of the market-oriented mechanism of deposit interest rates. At the same time, after the new RMB loans of residents turned negative again in April and the average price of new commercial houses in 70 large and medium-sized cities decreased by 0.1% year-on-year, the reduction of LPR and the reduction of the lower limit of the first mortgage interest rate announced by the central bank reflect the determination of the central bank to stabilize effective demand. At the same time, under the overall policy of “housing without speculation”, it is determined to support rigid and improved housing demand and stabilize the real estate market. After adjustment this month, the LPR of 1-year and 5-year periods are 3.7% and 4.45% respectively.
A 15 BP reduction in the five-year LPR is equivalent to taking three steps in this previous step, indicating that the central bank has effectively promoted the decline of the medium and long-term capital cost of banks by reducing the reserve requirement, promoting the decline of deposit interest rate and reducing the provision rate. The LPR quotation is adjusted in steps of 5bp. Generally, a 10bp interest rate cut will pry the five-year LPR down by 5bp. Therefore, it can be said that the five-year LPR will take three steps at one time this month. It can be seen that the market-oriented adjustment mechanism of deposit interest rate previously implemented by the central bank, that is, banks adjust deposit interest rate with reference to 10-year Treasury bond yield and 1-year LPR, has a significant effect on reducing bank capital cost. Overall, since December 2021, there have been two standard cuts and one interest rate cut. After the recent deposit interest rate reform, the weighted average interest rate of new deposits in banks has decreased by 10bp to 2.37%. The superposition of multiple policies can reduce the medium and long-term capital cost of banks by nearly 15bp.
Previously, we have repeatedly raised the issue of the expansion of the interest rate spread of two-term loans in the report. After the “reverse” asymmetric interest rate cut, the two-term LPR returned to the equilibrium level. At the beginning of the restructuring in August 2019, the two-phase LPR interest margin was 60BP. However, due to the limitation of the scale of MLF interest rate reduction and the change step of LPR, the interest margin continued to widen to the 90BP level in April this year. After the five-year LPR was lowered this month, the interest rate spread returned to 75bp, which was basically the same as that in April 2020.
The five-year LPR cut and the lower limit of the first loan interest rate recently issued by the central bank reflect the central bank’s determination to stabilize growth and stabilize effective demand, and also reflect the central bank’s structural role of monetary policy under the framework of “no speculation in housing”. The decline in effective demand reflected by the financial data in April is not only reflected in the year-on-year decrease of nearly 800 billion yuan in medium and long-term new RMB loans, but also reflected in several data reflecting the demand of entities this month. Among them, the year-on-year growth rate of new commercial housing prices showed the first negative growth since November 2015. In addition to stabilizing growth and stimulating the recovery of effective demand, we believe that the central bank’s promotion of LPR reduction is a continuation of “improving real estate policy and supporting rigid and improved housing demand” mentioned in the previous monetary policy implementation report and “strengthening new urban financial services” proposed by the central bank before the two sessions of this year. Superimposed on the lower limit of interest rate cut by 20bp recently, the interest rate of the first commercial personal housing loan was cut by 35bp this month, which is expected to stabilize the RMB loan of residents and drive the stabilization of the real estate industry at the same time.
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