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Event: on May 20, the LPR quotation of the current month changed, 5Y LPR decreased 15bp to 4.45% compared with the quotation of the previous month, and 1y LPR remained unchanged at 3.7%. This is the first time since the improvement of LPR mechanism in August 2019 that only 5Y period is reduced and 1y period remains unchanged. The last reduction of 5Y LPR occurred in January this year. At that time, 5bp was reduced to 4.60%. Previously, 5Y LPR remained unchanged for 21 consecutive months.
I. why did 5Y LPR decrease? The biggest purpose is to guide enterprises to reduce the comprehensive financing cost, promote the resumption and expansion of enterprises and increase effective investment under the background of the impact of the epidemic on the economy. It should be noted that the background of this reduction of 5Y LPR is that the current round of Shanghai epidemic has a significant impact on the supply and demand of the real economy. The momentum of financing and production expansion of real enterprises is insufficient and the financing demand is weak, which is quite similar to the background of the impact of the first round of epidemic in early 2020, and even more so in terms of the weakening degree of enterprise credit demand. The 15bp reduction in the long-end LPR will have a comprehensive reduction in financing costs for all kinds of enterprises.
II. From the perspective of this 5Y LPR reduction, is the real estate regulation policy loose? First cut the first mortgage interest rate by adding a lower limit, and then slightly cut 5Y LPR, just to avoid the expectation of stimulating the real estate foam in first tier cities and eastern coastal areas again; At present, the real estate regulation policy still focuses on stimulating the real estate sales of the second and third tier cities and the central and western regions due to urban policies. The decision to reduce 5Y LPR reversely shows that the policy level is also cautious about the real estate sales prospect of the first tier cities under the current situation. Last Sunday, the central bank and the China Banking and Insurance Regulatory Commission decided to lower the national lower limit of the first house loan interest rate by 20bp. At that time, we analyzed and believed that this operation was intended to break the old and new, and mainly aimed to further open the space for the relaxation of the first house loan interest rate in the second and third tier cities that have reached the original lower limit, and at the same time, we intended to reduce the effect of reducing the house loan interest rate in the first tier cities and the eastern coastal areas, The purpose of promoting the improvement of real estate demand balance due to urban implementation is relatively clear. After that, the market itself lowered the expectation of 5Y LPR reduction, and chose to carry out the higher than expected 5Y LPR reduction at this time, which just shows that the interview chart of the policy level points this operation more to the guiding decline of the overall enterprise credit financing cost, rather than the directional change of the real estate regulation policy. In terms of range, the reduction range of 15bp in this round is quite restrained compared with 165bp under the benchmark interest rate of 5Y loan in 14-15 years.
III. why did 5Y LPR decrease unilaterally and 1y LPR remain unchanged for the first time? This operation structure highlights that the forward force of monetary policy has been basically completed this year, and the liquidity has been quite abundant. At present, the central bank mainly focuses on guiding the release of credit demand, and does not want the market to form a more relaxed expectation of monetary policy operation. China's base money operation is mainly carried out through one-year instruments. At present, a policy interest rate curve from 7-day reverse repurchase to 1y MLF interest rate and 1y LPR has been formed. If 1y LPR is lowered, it will more represent the policy signal that the Central Bank continues to release base money to promote further ample liquidity in the inter-bank market. Since this year, the central bank has implemented four batches of liquidity investment, which has been able to better meet the M2 growth rate of about 9.5% under the annual wide credit target. It is expected that the focus of the follow-up monetary policy is to dredge the credit demand rather than further increase the liquidity investment. The probability of further RRR reduction during the year is low.
IV. what is the impact of this LPR reduction? Is there room for further reduction? Considering that the reduction of 5Y LPR has caused the squeeze of bank interest rate spread and profit transfer to the real economy to a certain extent, and considering the low necessity of further liquidity in the short term of monetary operation, 1y LPR has not been further reduced to restrict the downward space of bank deposit interest rate, we expect that the LPR may maintain the level of this month and the space for further reduction will be narrow. In April, the self-discipline mechanism of deposit interest rate carried out market-oriented reform, introduced two anchor interest rates: 10Y treasury bond yield and 1y LPR, and the new deposit interest rate decreased slightly; In addition, the provision requirements of commercial banks have also been relaxed this year, but the 5Y LPR has been reduced by 15bp at one time, a total of 20bp has been reduced during the year, and the 1y LPR has also been reduced by 15bp at the end of the year and the beginning of the year. The downward range is greater than the cost of bank liabilities, which inevitably leads to the squeeze of bank interest margin.
The reduction of 5Y LPR is expected to play a better role in promoting the medium and long-term loans of enterprises. In addition to the measures such as the lower limit of the first mortgage interest rate that has been implemented before, it is expected that the local real estate sales and housing loan demand will improve, the long-term interest rate may rise slightly, while the forward force of currency is basically completed, the short-term interest rate has been quite low, and the follow-up or low-end interest rate will rise slightly, Although the overall interest rate is not high, it can no longer guide the deposit interest rate to further decline. Comprehensive analysis shows that the unilateral reduction of 5Y LPR is conducive to the release of medium and long-term loan demand of enterprises and residents, but the wider credit is more effective, which also means that the space for further reduction of LPR is narrower.
