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China Fund News reporter Zhang Ling and Li Shuchao

The central bank announced in the morning of July 22 that from now on, the 7-day reverse repurchase operation in the open market will be adjusted to a fixed rate and quantity bidding, and the operating interest rate will be adjusted from the previous 1.8% to 1.7%.

On the same day, the central bank announced that the July loan market benchmark rate (LPR) was released, with the 1-year LPR at 3.35% and the 5-year LPR at 3.85%. This means that the central bank will lower both the 1-year and 5-year loan market benchmark rates (LPR) by 10 basis points.

At the same time, the central bank issued an announcement stating that in order to increase the scale of tradable bonds and ease the supply and demand pressure in the bond market, starting from this month, medium-term lending facility (MLF) participating institutions that have the need to sell medium- and long-term bonds can apply for a phased reduction or exemption of MLF collateral.

Talking about the impact of the central bank's "interest rate cut", the interviewed macro experts said that the central bank's series of actions have released clearer policy interest rate signals, increased the intensity of economic counter-cyclical regulation, and are conducive to creating a better monetary and financial environment for the continued recovery and high-quality development of the economy. The 5-year LPR rate cut will help further reduce mortgage costs.

Demonstrating the determination of monetary policy to protect economic recovery

The interest rate of this open market 7-day reverse repurchase operation was reduced from the previous 1.8% to 1.7%, which is the first adjustment since August 2023.

Wen Bin, chief economist of China Minsheng Bank, and Zhang Liyun, director of the Financial Market Research Center of China Minsheng Bank Research Institute, both said that my country's GDP grew by 4.7% year-on-year in the second quarter, slowing down from the first quarter, especially the weak recovery of household consumption, and the counter-cyclical efforts need to be strengthened. The central bank's decisive "rate cut" this time shows the determination of monetary policy to protect the economic recovery, and is a positive response to the requirement of the Third Plenary Session of the 20th CPC Central Committee to "unswervingly achieve the annual economic and social development goals."

They believe that as the suspension of "manual interest supplementation" gradually takes effect, the liability cost of banks has improved and the downward pressure on interest rate spreads has eased relatively; major overseas economies have gradually entered a cycle of interest rate cuts, and the pressure to stabilize the exchange rate has also eased relatively. To this end, under the overall consideration of "focusing on the domestic market and balancing the internal and external markets", the 7-day reverse repurchase rate cut has been implemented, which is expected to be gradually transmitted to the real economy through the financial market, promote the reduction of comprehensive financing costs, consolidate the upward trend of the economy, and break the negative cycle of the downward trend of long-term bond yields and the weakening of expectations.

However, they stressed that the downward trend of the 7-day reverse repo rate does not mean that the long-term bond yield has room to fall. The central bank lowered the 7-day reverse repo rate this time to increase counter-cyclical regulation and smooth out short-term economic fluctuations; while the medium- and long-term bond yields reflect more long-term economic trends and need to be evaluated from a cross-cycle perspective. "In order to avoid continued overshooting of long-term bond yields, it is expected that the central bank will also adopt a comprehensive policy to protect and guide them."

"In June this year, Pan Gongsheng, governor of the central bank, said at the 2024 Lujiazui Forum that in the future, it is possible to consider clearly using a short-term operating interest rate of the central bank as the main policy interest rate." Yang Chang, chief analyst of Zhongtai Securities, said that at present, the 7-day reverse repurchase operating interest rate has basically assumed this function. At the same time, adjusting to a fixed interest rate bidding will help further smooth the monetary policy transmission mechanism, release a clearer policy interest rate signal, and influence market expectations.

"The reduction in the 7-day reverse repurchase rate also reflects the policy intention of lowering interest rates to support the real economy, which will be conducive to creating a better monetary and financial environment for the sustained economic recovery and high-quality development." Yang Chang further stated that in terms of the reduction in the reverse repurchase operation interest rate, this time it was reduced by 10 BP. Since entering the reduction cycle in 2020, except for a one-time reduction of 20 BP at the beginning of 2020, each reduction has been adjusted by 10 BP, reflecting the policy intention of prudent adjustment.

"The series of actions taken by the central bank today, on the one hand, have released the message of increasing countercyclical economic regulation, strengthening the implementation of monetary policy, reducing consumption and investment costs, and supporting economic recovery. On the other hand, it has deepened the interest rate marketization reform and improved the market-based interest rate regulation mechanism." Zhou Maohua, a macro researcher at the Financial Markets Department of China Everbright Bank, said that at the same time, the phased reduction and exemption of MLF collateral will help release more marketable medium- and long-term bonds for institutions, help increase the supply of the bond market, and thus affect expectations for bond market trends.

Zhou Maohua also believes that as domestic macroeconomic policy implementation becomes more vigorous and the central bank takes measures to actively stabilize market expectations, long-term bond interest rates are expected to gradually return to a reasonable range.

Helps to further reduce mortgage costs

Regarding the impact of the central bank's "interest rate cut" on the real estate market, Yan Yuejin, research director of the E-House Research Institute, said that the 5-year LPR rate cut will help further reduce mortgage costs.

Yan Yuejin believes that judging from the trend of LPR, the first quarter of this year showed a trend of "breaking 4", that is, falling from 4.2% to 3.95%. The second interest rate cut this year has further guided the reduction of mortgage costs. Calculated based on the current mainstream mortgage interest rates in various places, that is, the pricing formula of "LPR-75BP", the mainstream interest rate for the first home was 3.2% in the past, but now it will drop to 3.1%.

He gave an example, saying that according to the loan principal of 1 million yuan and the repayment method of equal principal and interest for 30 years, the total mortgage interest will be reduced by nearly 20,000 yuan and the monthly payment will be reduced by 55 yuan.

"If the effect of continued interest rate cuts is superimposed, the effect of reducing monthly payments will be very obvious, which will help combine with other policies to continuously reduce mortgage costs," said Yan Yuejin.

"Previously, some banks have begun to cut interest rates based on competition for mortgage shares. For example, the lowest interest rate for first-home mortgages in Guangzhou has dropped to around 3.1%." Li Yujia, chief researcher at the Guangdong Housing Policy Research Center, believes that the market expectation for continued and sustained interest rate cuts exists. For residents who want to purchase commercial housing, except for basic needs, they can choose to wait for other housing purchase needs.

At the same time, regarding the issue of existing housing loans, there have been various calls for reductions this year.

Yan Yuejin pointed out that the impact of this LPR adjustment on existing mortgage loans is that the cost of related mortgage loans may be further reduced by next year. Considering that the LPR has been reduced by 35BP this year, the monthly payment pressure of a 1 million yuan mortgage is expected to be reduced by 175 yuan next year. The interest rate cut for existing mortgage loans, which is currently being called for by citizens, actually refers to a reduction in basis points. If the current incremental mortgage interest rate is relatively high, then there will be a large contrast in the future, or the work of reducing existing mortgage loans in the second half of the year will be put on the agenda.

Wen Bin and Zhang Liyun of China Minsheng Bank also paid attention to the problem of existing mortgage loans. They said that the interest rates of first-home mortgage loans in many places continued to fall, with the lowest "rolling" in cities such as Guangzhou and Nanjing reaching 3%, and the interest rate spread with the existing mortgage interest rate further widened. Affected by this, the willingness to repay mortgages early has risen again, causing a significant disturbance to the net increase in residents' medium and long-term loans. In this context, lowering the LPR, and then driving the repricing of mortgage interest rates at the beginning of next year, can alleviate residents' willingness to repay early to a certain extent and stabilize residents' credit.

Editor: Captain

Audit: Wooden Fish

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