Where will interest rate regulation come from as LPR continues to remain stagnant?
2024-06-21
On June 20th, the market quoted interest rate (LPR) for the new phase of loans was released, and the LPR for 1-year and 5-year and above has not been adjusted for multiple consecutive periods. Currently, there is pressure on bank interest rate spreads within the interest rate adjustment, and external constraints on the RMB exchange rate. Where will the next step be to exert the role of interest rate regulation? On that day, the People's Bank of China authorized the National Interbank Funding Center to announce that the one-year LPR was 3.45%, and the five-year and above LPR was 3.95%, both of which remained unchanged from the previous period. LPR has replaced the benchmark interest rate as the anchor for loan interest rate pricing, and has remained stagnant for several consecutive months, in line with previous market expectations. At present, there is insufficient motivation for LPR quotation banks to lower their prices. As of the end of the first quarter, the net interest margin of commercial banks in China has further decreased by 15 basis points compared to the end of the previous year, reaching a historic low of 1.54%. Entering the second quarter, loan interest rates are still declining. According to Wen Bin, Chief Economist of China Minsheng Bank, after multiple real estate financial policies were introduced in May, many regions have cancelled the lower limit of mortgage interest rates, lowered the down payment ratio and provident fund loan interest rates. This has led to a significant increase in the decrease in new mortgage loan interest rates, further putting pressure on bank interest rate spreads, and making it difficult for LPR quotes to have any room for short-term reduction. It is worth noting that the LPR for 1-year and 5-year and above has not been adjusted for 10 and 4 months respectively, but loan interest rates have remained stable with a downward trend. In May, the weighted average interest rate for newly issued corporate loans was 3.71%, which was 6 and 25 basis points lower than the same period last month and the previous year; The interest rate for newly issued personal housing loans is 3.64%, which is 6 and 53 basis points lower than the same period last month and the previous year. This has caused many industry insiders to question whether the quoted interest rates of some banks have deviated? Experts believe that LPR was originally the loan interest rate offered by financial institutions to their most favorable customers, but it is clear that the current LPR quotes of banks themselves cannot fully and accurately reflect their actual most favorable customer loan interest rates. In response to this, Pan Gongsheng, the President of the People's Bank of China, recently stated at the 2024 Lujiazui Forum that we will continue to reform and improve LPR. In response to the problem of some quoted interest rates significantly deviating from the actual most favorable customer interest rate, we will focus on improving the quality of LPR quotations and more accurately reflecting the level of loan market interest rates. In recent years, China has continuously promoted the market-oriented reform of interest rates and has basically established mechanisms for interest rate formation, regulation, and transmission. From the policy interest rate of the People's Bank of China to the market benchmark interest rate, and then to various financial market interest rates, the overall transmission can be relatively smooth. "But there is also some room for improvement." Pan Gongsheng said that in the future, it is possible to consider clearly setting a short-term operating rate of the People's Bank of China as the main policy interest rate. Currently, the 7-day reverse repurchase operating rate has basically taken on this function. The interest rates of other term monetary policy tools can dilute the color of policy interest rates and gradually streamline the transmission relationship from short to long. According to market analysts, as a medium-term policy interest rate, the medium-term lending facility (MLF) interest rate often deviates from the trend of market interest rates for the same period. The People's Bank of China may mainly focus on managing short-term interest rates, gradually fading the policy interest rate color of MLF interest rates, and then streamlining the transmission mechanism of various monetary policy tools from short-term to long-term interest rates. As the overall financial target gradually weakens, price based regulation will play a more important role in the implementation of monetary policy. How much policy space does China have for interest rate regulation in the future? Since the beginning of this year, the People's Bank of China has repeatedly publicly stated that there is still room for monetary policy. Industry insiders believe that in addition to being constrained by the pressure of narrowing bank interest rate spreads, as the inverted range of the US China interest rate spread continues to expand, interest rate adjustments also need to consider the impact on the RMB exchange rate, and further policy interest rate cuts face multiple constraints. In response to this, the People's Bank of China has been sending clearer signals of interest rate regulation targets to the market through various channels, such as clarifying that short-term interest rates are the main policy interest rate. The People's Bank of China also explicitly proposes to leverage the interest rate corridor to regulate short-term interest rates and moderately narrow the width of the interest rate corridor. In recent years, China has gradually established and improved an interest rate corridor, and has initially built an interest rate corridor with the Standing Lending Facility (SLF) as the upper corridor and the excess deposit reserve rate as the lower corridor. "When regulating short-term interest rates, central banks usually use interest rate corridor tools as an auxiliary measure to 'frame' money market interest rates within a certain range." Pan Gongsheng said that the overall width of the interest rate corridor is relatively large, which is conducive to fully leveraging the role of market pricing and maintaining sufficient elasticity and flexibility. But overall, the width of China's interest rate corridor is about 245 basis points, and the relatively large width often makes the market's consensus range for the central bank's interest rate regulation not particularly clear. Pan Gongsheng stated that in the future, the width of the interest rate corridor can be moderately narrowed to convey clearer signals of interest rate regulation targets to the market. (Lai Xin She)
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