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Cailianshe News, July 18 (Reporter Liang Kezhi)As the July LPR adjustment date approaches, market expectations for interest rate cuts have risen again.

On July 15, the central bank announced that it carried out 129 billion yuan of reverse repurchase operations and 100 billion yuan of medium-term lending facility (MLF) operations on that day to fully meet the needs of financial institutions. The prices of both remained unchanged, with a net injection of 127 billion yuan in 7-day reverse repurchases and a slight reduction of 3 billion yuan in MLF.

Although the MLF remained unchanged in July, Zhang Jun, chief economist of Galaxy Securities, believes that the central bank will adopt a "different" interest rate cut, and the LPR may be lowered by 10BP-20BP in July. The main reason is that the LPR reduction has been freed from the constraints of the MLF since 2023, and lowering the LPR alone can guide the financing costs of the real economy downward to promote economic growth.

Industrial BankChief Economist Lu Zhengwei also believes that if the LPR quotation mechanism is optimized starting from July, it is expected that the LPR can be pushed down by about 10-20bp.

Unlike in the past, July LPR is also a key time node for optimizing the generation mechanism.

In the past month, the central bank has made a series of statements on this matter. First, Governor Pan Gongsheng publicly stated that "in the future, we may consider making a short-term operating rate of the central bank the main policy rate." On July 12, the Financial Times published an article saying that the loan market benchmark rate (LPR) may be improved, and the improvement direction is mainly to adjust the reference open market operation rate from the previous one-year MLF rate to the 7-day OMO rate.

Cailianshe reporters noticed that since July,CITIC Securities, Galaxy Securities,Zheshang SecuritiesInstitutions such as and Industrial Bank have successively released reports saying that considering that LPR fails to fully reflect market interest rates, they called for optimizing its generation mechanism to improve the effectiveness and flexibility of monetary policy.

Three reasons for the sharp drop in LPR in July

Since the LPR for terms of more than five years was sharply reduced by 25 basis points in February, the LPR has not been adjusted for four consecutive months.

Data from reports from Galaxy Securities and CITIC Securities both showed that at the end of March, approximately 40% of loans from financial institutions were subject to the LPR reduction, while in August 2019 the figure was only 15.55%.

He Fan, a senior researcher at Industrial Bank Research, believes that based on the definition of LPR, LPR is the loan interest rate for the bank's best customers, and the current proportion of loans that have a reduction in LPR is as high as 40%, indicating that the LPR quotation does not fully reflect the optimal price for bank loans.

At the same time, the current market actual interest rate is relatively high. Zhang Jun, chief economist of Galaxy Securities, believes that further reduction is needed to promote economic growth, and the necessity of reduction is increasing.

Specifically, the financing interest rate for residents to purchase housing is still higher than the investment return; the corporate sector's willingness to invest has declined, and the expansion of reproduction has slowed down; from the government's perspective, the issuance of local government special bonds has been slow since 2024, and one of the reasons is that the return on investment is not enough to cover the cost.

On the other hand, the bank's liability costs have fallen in the past few months. He Fan, a senior researcher at Industrial Bank Research, believes that in the first half of 2024, the inversion between the NCD rate and the MLF rate will deepen, and the interbank liability costs will decline to a certain extent; at the same time, the standardization of "manual interest supplement" will be conducive to the decline in deposit costs, and the current LPR quotation reduction is reasonable.

A research report by Xingzheng Securities predicts that by optimizing the quality of LPR quotations, the LPR can be pushed down by 10-20bp.

The call for optimizing the LPR mechanism is growing, which may be the appetizer for the reform of the monetary regulation mechanism

The above-mentioned institutions believe that the current LPR fails to fully reflect the actual price level of the loan market.

This is in line with the central bank governor Pan Gongsheng'sLujiazuiThe forum emphasized the consensus view of "continuously reforming and improving the Loan Market Reference Rate (LPR), addressing the problem of some reference rates significantly deviating from the actual most favorable customer rate, focusing on improving the quality of LPR quotations, and more truly reflecting the level of loan market interest rates."

Xiao Feifei's team at CITIC Securities believes that after the LPR reform, the central bank will be more flexible in using policy interest rates to maintain liquidity in the banking system, which will to some extent alleviate the inconsistency in the monetary policy goals of lowering social financing costs (lowering loan interest rates) and reducing idle funds (stabilizing fund interest rates).

Xiao Feifei's team also believes that since the deposit self-discipline mechanism is linked to the 10-year treasury bond yield and the LPR rate, this LPR reform strengthens the connection between deposit pricing and the OMO rate, and is expected to alleviate the impact of asynchronous asset-liability pricing on commercial banks' interest rate spreads.

Overall, the LPR pricing mechanism is expected to be optimized, and the 7-day OMO interest rate is expected to become the pricing benchmark for both assets and liabilities.

However, Zheshang Securities analyst Qin Han believes that the LPR benchmark anchor may change from MLF to the 7-day reverse repurchase operation rate, but the LPR reform is only a prelude to the reform of the central bank's monetary regulation mechanism.

Combining the statements of Pan Gongsheng and the central bank, Qin Han believes that the central bank will adjust the credit market interest rate through LPR reform, which is similar to the Federal Reserve's "policy interest rate-money market interest rate-real interest rate" mechanism; it will inject medium- and long-term liquidity and influence the treasury bond market interest rate by buying and selling treasury bonds.

Cailianshe reporters noticed that Pan Gongsheng said in his speech at the Lujiazui Forum that it is imperative to shift from quantitative regulation to price regulation in the medium term. In the short term, the mainstream is to sort out the monetary regulation mechanism and gradually improve the toolbox.