Will LPR drop after the RRR cut? A quick overview of the latest ideas of the organization

China's July loan market quotation rate (LPR) may be released today, and whether the benchmark interest rate, which has been flat for more than a year, will follow the downward trend of the cut has attracted market attention for the first time since the across-the-board cut took effect.

On July 9 this year, the central bank announced that it had decided to lower the deposit reserve ratio of financial institutions on July 15, 2021, and is expected to release about 1 trillion yuan of long-term funds. Citic Securities clearly believes that by injecting stable funds into financial institutions to promote a decline in comprehensive costs, is expected to lead to LPR adjustment, but MLF interest rates and price transmission time delay may restrict its downward space.

In addition, the changes in the LPR quotation will affect the subsequent monetary policy adjustment and the trend of medium-and long-term interest rates.

From a historical point of view, the 50BP reduction belongs to the critical state that can be lowered but not lowered for one-year LPR. Since the reform of LPR, every interest rate cut (MLF interest rate reduction) will inevitably trigger a reduction in LPR and other magnitude, while a reserve reduction is not necessary, because LPR is the result of rounding to the nearest multiple of 5BP according to the quotation line quotation. If the reduction of the quotation line plus point is not enough, the LPR will not be lowered.

According to the supplement of the Monetary Policy implementation report issued by the central bank in September 2019 and January 2020, the central bank cut the 5BP twice in September 2019 and January 2020, and some quotation banks lowered their quotations in the same month, driving the arithmetic average of quotations down by 2-3BP, but only in September 2019 triggered an one-year LPR downgrade.

Song Xuetao of Tianfeng Securities believes that there is a certain difference in the situation this time:

1) on June 21, the market interest rate pricing self-regulation mechanism optimized the method of determining the self-regulation limit of deposit interest rates. The self-regulation limits of short-end time deposits and large certificates of deposit within half a year have increased, while the long-end interest rate self-regulation limit of more than one year has decreased, which is generally conducive to reducing the cost of banks' debt end. This comprehensive reduction reduces the capital cost of financial institutions by about 13 billion yuan per year (about 1-2BP). The two cost reduction policies of deposit interest rate reduction and reserve reduction have been implemented successively, and banks can give more room for profit on the asset side.

(2) on July 7, the National standing Committee proposed that "timely use of monetary policy tools such as reserve requirement reduction to further strengthen financial support to the real economy, especially small and medium-sized enterprises, and promote a steady decline in comprehensive financing costs." on July 8, the New State Council Office proposed that "we should continue to release the potential of LPR reform, properly implement the regulatory requirements for optimizing deposit interest rates, and promote a further reduction in real loan interest rates." From the point of view of reducing the comprehensive financing cost, releasing the reform potential of LPR and lowering the real loan interest rate, the policy goal still points to the moderate reduction of LPR.

Song Xuetao predicts that the 1-year LPR will be downgraded and the 5-year LPR will not be downgraded. 1) whether it is September 2019 or January 2020, the five-year LPR has not been lowered, and its reduction needs to be based on the reduction of the policy interest rate; 2) the five-year LPR is directly linked to the mortgage interest rate, and it is not suitable to be lowered under the current situation that the real estate market is still partially overheated, and the reduction of the 5-year LPR is not relevant to supporting small and medium-sized enterprises.

In addition, stocks and bonds have a certain price for LPR downgrade expectations, if the impact of the downgrade is limited. Since the National standing Committee put forward the timely use of the reserve rate reduction tool on July 7th, the stock and bond market has set a certain price for the reduction of LPR expectations. In terms of bonds, the interest rate on 1-year government bonds fell 13.8 BP, the one-year bond opening rate fell 9.5 BP, while in equities, the Citic banking index fell 2.8%, compared with a 0.4% rise in the WIND all-An index.

Therefore, if the one-year LPR cut this month, the further impact on the market is relatively limited, but short-end interest rates are still likely to react positively. Fundamentally, if the downgrade of LPR also belongs to the continuation of the effect of the previous across-the-board reserve reduction, it is not a new policy signal.

Citic Securities clearly believes that the impact of the reduction of benchmark interest rates on superimposed deposits on the cost of capital of commercial banks is expected to lead to lower LPR quotations. Deposit benchmark interest rate reform directly refers to the cost of bank debt, and then the landing of the reserve cut is expected to release about 1 trillion yuan of long-term funds for the market. The two factors of "volume" and "price" are superimposed at the same time, even if the MLF interest rate is not adjusted, it can effectively reduce the rate of increase and form a strong impetus to the downside of LPR.

If LPR remains unchanged, there will be less room for banks to reduce their own pressure. Under the policy goal of "enhancing the capacity of financial services to better support the real economy", the decline in LPR is the most direct and effective way to control real lending rates.