Just tomorrow! This interest rate on mortgages is about to be lowered?

Source: China Securities News

After the rate cut, the new loan market quotation rate (LPR) will be released on January 20. Last month's 1-year LPR fell by just 5 basis points, from 3.85% to 3.8%, while the 5-year LPR has not moved since April 2020 and has remained at 4.65%.

As for whether the LPR will go down and how much it will go down, especially how to adjust the LPR of more than 5 years linked to the mortgage interest rate, the market discussion in recent days can be described as hot.

Image source: China Money Network

According to Zou Lan, director of the Financial Market Department of the People's Bank of China, by the end of 2021, the balance of real estate loans nationwide will reach 52.2 trillion yuan.

LPR has a high probability of falling

Most experts believe that after the mid-term lending facility (MLF) and open market operation interest rates fell on January 17, the LPR decline this month is a high probability event.

"Under the framework of the current LPR anchoring MLF rates, a decline in MLF rates may lead to a decline in LPR, with a 1-year LPR or a 10 basis point decline." Zhao Wei, chief economist of Guojin Securities, said.

Wang Qing, chief macro analyst of Oriental Jincheng, also believes that after the decline in MLF interest rates, the LPR of 1 years and more than 5 years will be reduced, especially if the LPR above 5 years is reduced, it will play a role in stabilizing the expectations of the real estate market.

Under the current formation mechanism, LPR quotation = MLF interest rate + quotation line plus point, then is it possible for the quotation line to further compress and add points on the 20th, so that the LPR decline is greater than the MLF decline?

In this regard, Zhang Xu, chief fixed income analyst at Everbright Securities, expects that the LPR point increase may remain unchanged.

"MLF rates can react quickly in the short term based on policy orientation. Therefore, the decline in MLF interest rates is easier to achieve the policy goal of guiding the interest rate of the loan market downward, and the regulation effect on short-term goals is better. However, the decline in MLF interest rates hinders the compression of the LPR plus point. Zhang Xu explained.

It is worth mentioning that at the press conference held on the 18th, Sun Guofeng, director of the Monetary Policy Department of the People's Bank of China, also said that LPR quotation banks comprehensively consider their own capital costs, risk premiums and market supply and demand and other factors when quoting, LPR will fully reflect the changes in market interest rates in a timely manner, guide the downward trend of corporate loan interest rates, and effectively promote the reduction of comprehensive financing costs of enterprises.

It can be seen that the first LPR announced in 2022 has become a high-probability event to usher in a "interest rate cut".

The decline in LPR above 5 years will be a major attraction

Although the market has formed a consensus expectation for the downward LPR, there is still controversy about the decline in the LPR for both terms.

Since the LPR with a maturity of more than 5 years is linked to the mortgage, its changes must also be closely related to the regulation of the real estate market. Many experts believe that the LPR of more than 5 years on the 20th will be reduced. For example, Zhong Zhengsheng, chief economist of Ping An Securities, believes that under the influence of various regulatory policies, the current investment and speculative demand for housing has been curbed. Historically, when the downward pressure on house prices is large and the demand for stable real estate investment is strong, it is usually accompanied by RRR cuts and interest rate cuts. Therefore, the decline in LPR above 5 years may play a positive role in saving costs and stabilizing confidence for some buyers who just need to wait and see, and help to better meet reasonable housing needs.

From the perspective of decline, some experts believe that the decline of the two will remain the same. Wen Bin, chief researcher of Minsheng Bank, expects that in order to promote the stabilization and decline of financing costs in the real economy, LPR quotations for 1-year and more than 5 years on January 20 will most likely drop by 10 basis points.

Zhang Jiqiang, chief fixed income analyst of Huatai Securities, analyzed that after the RRR cut in December last year, the 1-year LPR fell in the same month, but the LPR above the 5-year period was not adjusted, mainly because the reduction in bank costs was not enough to drive the two to fall together. "However, in recent times, the problem of real estate has not only been reflected in the debt risk level of individual housing enterprises, but also the demand for real estate market has weakened significantly." In this case, the LPR of the two periods will most likely decline simultaneously this month. He said.

Some experts believe that the decline of the two may not be the same, the 1-year LPR or the decline is even greater, and the LPR decline of more than 5 years linked to the mortgage will be more conservative. For example, Wang Yifeng, chief banking analyst of Everbright Securities, expects that the LPR of the two terms may decline asymmetrically, and it is expected that the 1-year LPR may fall by 5 to 10 basis points on the 20th, and the LPR above 5 years may fall by 5 basis points.

"Judging from the law of MLF interest rate adjustment and LPR quotation change, the decline in MLF interest rates greater than or equal to 10 basis points has occurred twice, that is, in February and April 2020, the LPR of the two terms after these two rate cuts has declined, and the ratio of declines in 1-year and 5-year periods is 2:1." Wang Yifeng said.

Monetary policy still needs to be further strengthened

Many experts said that after the interest rate cut on the 17th, the possibility of another decline in the policy interest rate in the short term is reduced, but stable economic growth still requires further efforts in monetary policy. Specifically, the RRR cut in the first quarter can still be expected. The regulatory authorities have made it clear that there is still room for a certain reduction in the reserve requirement ratio.

Liu Guoqiang, vice governor of the People's Bank of China, said that whether compared with other developing economies or with the historical reserve requirement ratio of the mainland, the current level of reserve requirement ratio is not high, and the space for further adjustment has become smaller. However, from another point of view, there is still a certain amount of space that can be used according to the needs of economic and financial operation and macroeconomic regulation and control.

Xie Yunliang, chief macro analyst of Cinda Securities, analyzed that in order to meet the needs of deposit growth, the bank reserve account needs to increase by 1.5 trillion yuan in 2022, which is not realistic to rely solely on MLF investment, and it is also necessary to reduce the RRR at least once. "From the point of view of time, considering the financial front, the possibility of reducing the RRR in the first quarter is the greatest."

Huang Wentao, chief economist of CITIC Construction Investment Securities, believes that with the tight liquidity of the Spring Festival, the arrival of the tax period, especially the early issuance of special bonds in the first quarter, the market liquidity is still facing a certain degree of tension. According to past experience, after the interest rate cut, it is likely that the liquidity will continue to be released in conjunction with the RRR cut.

Recently, the Fed's monetary policy is accelerating tightening, and some people are worried that it may cause constraints on mainland monetary policy. In this regard, Zhong Zhengsheng said that even if the Fed accelerates tightening in 2022, the mainland's monetary policy will still be "dominated by me", and the operation of reducing the reserve requirement ratio can still be expected. At the same time, the RMB exchange rate releases greater flexibility in the direction of depreciation, and can also better play its role in regulating internal and external equilibrium.