Official announcement! LPR reduced by 10 basis points in May, mortgage interest rates further lowered, and a new round of deposit interest rate cuts also began on the same day

Today, the People's Bank of China (PBOC) authorized the National Interbank Funding Center to announce the Loan Prime Rate (LPR) for May 2025: the 1-year LPR is 3.0%, and the LPR for loans with a maturity of over 5 years is 3.5%. Both rates decreased by 10 basis points MoM.

Industry insiders told a reporter from Caixin that the LPR cut will further stabilize and reduce financing costs for the real economy, stimulate credit demand, and promote corporate investment. Meanwhile, the decrease in the LPR for loans with a maturity of over 5 years will help reduce the interest burden on mortgage borrowers and boost consumption.

LPR decreased by 10 basis points following the policy rate cut

The market had already anticipated the LPR cut in May. Previously, at the State Council Information Office press conference held on May 7, PBOC Governor Pan Gongsheng, when introducing a package of monetary policy measures, stated that the policy rate would be cut by 0.1 percentage point, i.e., the 7-day reverse repo operation rate in the open market would be lowered from the current 1.5% to 1.4%, which is expected to drive the LPR down by approximately 0.1 percentage point in tandem.

At that time, market analysts told a reporter from Caixin that it was expected that the policy rate cut would guide the Loan Prime Rate (LPR) and deposit rates to decrease in tandem, which would help maintain the stability of commercial banks' net interest margins. Meanwhile, through interest rate transmission, it would effectively reduce the comprehensive financing costs for the real economy and consolidate the economic fundamentals.

Wang Yifeng, chief financial analyst at Everbright Securities, also stated that considering the 10 basis point cut in the Open Market Operations (OMO) rate in May, it was estimated that the corresponding LPR would decrease by 10 basis points in tandem.

Wang Qing, chief macro analyst at China Lianhe Credit Rating, also said that a 0.1 percentage point cut in the policy rate (the PBOC's 7-day reverse repo rate) would guide the May LPR quote to follow suit and decrease, thereby reducing various types of loan interest rates.

In addition, starting from May 8, the interest rate on individual housing provident fund loans was cut by 0.25 percentage point. At that time, Wang Qing stated that driven by the 0.25 percentage point cut in the interest rate on individual housing provident fund loans, commercial personal housing loan interest rates would see a more significant decrease in the following period.

With the LPR cut for loans with a maturity of over 5 years in May, mortgage interest rates will also decline. Industry insiders stated that the decrease in the LPR for loans with a maturity of over 5 years will help reduce the interest burden on mortgage borrowers and boost consumption. According to calculations, for a commercial loan of 1 million yuan with a 30-year term and equal principal and interest repayment, a 10 basis point cut in the LPR will reduce the monthly mortgage payment by 56 yuan, resulting in a total reduction of 20,200 yuan over 30 years.

Monitoring data from Rong 360 Digital Technology Research Institute on mortgage interest rates in 45 key cities across China showed that in April 2025, the average interest rate for first-home loans nationwide was 3.10%, unchanged MoM and down 52 basis points YoY; the average interest rate for second-home loans was 3.21%, unchanged MoM and down 98 basis points YoY. Among the 45 key cities under monitoring, 12 cities had mainstream interest rates for first-home mortgages ranging from 2.99% to 3.00% (inclusive), with Guangzhou and Foshan offering the lowest rates at 2.99%. Thirty cities had mainstream interest rates ranging from 3.00% to 3.20% (inclusive), and three cities had mainstream interest rates ranging from 3.20% to 3.60% (inclusive).

Bank liability costs correspondingly decreased, initiating a new round of deposit interest rate cuts.

Jiang Changzheng, the Audit Partner-in-Charge for Financial Services in North China at EY Greater China, recently stated in an interview with Caijing that, based on the situation in Q1 2025, banks' net interest margins (NIMs) generally continued to narrow. Among the 42 A-share listed banks, 25 disclosed their NIMs in their Q1 reports, with 20 experiencing a decline compared to 2024, four showing an increase, and one remaining unchanged.

"On May 7, the People's Bank of China (PBOC) announced RRR cuts, as well as cuts in policy interest rates and interest rates for structural monetary policy tools. The market generally expects that the LPR will be adjusted accordingly, and deposit interest rates will also be adjusted," Jiang said.

"Considering the 10 basis point (bp) cut in the Open Market Operations (OMO) interest rate in May, it is estimated that the corresponding LPR will be cut by 10 bps synchronously. However, there will still be pressure on banks' NIMs, necessitating further strengthening of liability cost management to help banks stabilize their NIMs," Wang Yifeng had previously stated, emphasizing the need to closely monitor whether the listed deposit interest rates of state-owned and joint-stock banks will follow the LPR cuts.

On the day when the new LPR was announced, several banks, including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and China Merchants Bank (CMB), announced cuts in their listed deposit interest rates, with the maximum reduction being 25 bps.

Wen Bin, the Chief Economist at China Minsheng Bank, stated that the PBOC's Q1 monetary policy report, released earlier, proposed to "further improve the interest rate regulation framework, continuously strengthen the implementation and supervision of interest rate policies, reduce banks' liability costs, and promote a decline in the overall social financing costs." Compared to the previous report, this directly emphasized the reduction of banks' liability costs, indicating that the subsequent constraints of the self-regulatory mechanism will continue to be strengthened, and banks will also initiate a new round of deposit interest rate cuts. This is consistent with the PBOC's mention on May 7 of guiding a reduction in deposit interest rates through the interest rate self-regulatory mechanism.

Wen Bin further stated that, following a 10 bp policy interest rate cut and a synchronized LPR reduction, the corresponding reduction in banks' liability costs is necessary not only to strengthen interest rate coordination, stabilize NIMs, and promote the achievement of the "quadruple balance" goal of monetary policy, but also to create space for further reducing the overall financing costs of enterprises.