Matters:
On May 20, 2022, the quotation of five-year LPR loan interest rate was reduced by 15bp, which was the largest reduction of five-year LPR since August 2019, far exceeding the market expectation.
Ping An View:
What’s your intention? The five-year LPR offer was reduced by 15bp, the largest reduction since August 2019. There are two meanings: on the one hand, the five-year LPR quotation is linked to the individual housing loan interest rate, which further reflects the strong support for residents’ house purchase demand and real estate sales. It will be superimposed and matched with the measures to stabilize the real estate market in various regions, which will more effectively promote steady growth. On the other hand, the five-year LPR loan interest rate is also an important reference for banks to issue medium and long-term loans for infrastructure, manufacturing and fixed assets. This will open the downward space for medium and long-term loan interest rates of enterprises and stimulate the loan demand of the real economy.
What is the support? First, the market-oriented reform of deposit interest rate is an important supporting factor for the reduction of LPR quotation. The recent market-oriented reform of deposit interest rate has been fruitful, focusing on the “interest rate of time deposits with a term of more than 1 year and large certificates of deposit”, which matches the term of 5-year LPR. Second, on April 25, the central bank reduced the deposit reserve ratio, which also helped to reduce the capital cost of commercial banks. Our calculation shows that the RRR reduction in April has a broad mitigation effect on the debt cost of commercial banks of about 1.5bp. Third, the mismatch between supply and demand in the credit market is becoming more and more serious, and commercial banks have the power to reduce their five-year LPR quotation. In addition, as the constraints of exchange rate and inflation on MLF interest rate adjustment still exist, the market-oriented reform of deposit interest rate may still be a more important starting point for reducing loan interest rate in the future. However, “steady growth” is an important prerequisite for “stabilizing the exchange rate”, and the MLF policy interest rate may be further reduced if necessary.
Why? The 5-year LPR quotation reduction will help “steady growth”. The year-on-year growth rate of the main economic data in April released by the National Bureau of statistics on May 15 was generally lower than that in March. On May 18, Premier Li Keqiang held a symposium on stabilizing growth, stabilizing market players and ensuring employment, and proposed that “all regions and departments should enhance their sense of urgency, tap the potential of policies, make sure that new measures that are accurate can be used up, and do their best in May, so as to ensure that the economy operates in a reasonable region in the first half of the year and the whole year, and strive to make the economy return to the normal track quickly”. On May 20, the central bank announced that the quotation of five-year LPR loan interest rate was reduced by 15bp, which is in response to the steady growth demand of “being able to use up” and “being able to give out”.
Follow up space? It is expected that the weighted average interest rate of individual housing loans based on the caliber of the central bank may fall to about 5%, with a downward space of 40-50bp compared with 5.49% in the first quarter of 2022. On the one hand, the downward 15bp of the five-year LPR interest rate quotation is expected to be fully transmitted. On the other hand, the point difference between LPR and individual housing loan interest rate is expected to drop by about 30bp. However, if the subsequent pressure of “steady growth” is further increased, and more first tier and second tier cities cut the lower limit of local real estate loan interest rate relative to LPR, it may further drive the real estate loan interest rate down to about 4.5%, reaching the low level since 2016.
