LPR quotes remained unchanged in June, with industry insiders predicting that interest rate cuts may continue in H2, driving LPR down.

Today, the People's Bank of China authorized the National Interbank Funding Center to announce the loan prime rates (LPR) for June 20, 2025: the 1-year LPR stood at 3.0%, while the 5-year and above LPR was 3.5%. Both tenors remained unchanged MoM.

Multiple industry analysts told Cailian Press that the unchanged June LPR aligned with market expectations. Following the central bank's policy-driven interest rate cut in May, LPRs for both tenors declined synchronously, and the adjustment is currently transmitting to lending rates. With policy rates holding steady in June, no material changes occurred in factors affecting LPR pricing spreads.

Industry experts anticipate a short-term policy observation period where LPRs may remain stable. Looking ahead, the central bank is expected to implement further interest rate cuts in H2, with both LPR tenors likely to decline. Additionally, regulators may separately guide the 5-year and above LPR lower to facilitate more substantial reductions in residential mortgage rates during H2.

Policy Enters Observation Period as June LPRs Stay Unchanged

Regarding the unchanged June LPRs, analysts widely viewed this as market-consistent. "After May's 10bps LPR reduction following reverse repo operations rate cuts, policies entered an observation phase, and June reverse repo rates remained unadjusted," said Yi Zhao, macro analyst at CITIC Securities. Post May's RRR cuts and interest rate cuts, the effectiveness of aggregate policy tools is being monitored. Without reverse repo rate guidance, commercial banks lack strong motivation to independently compress LPR spreads over policy rates.

Zhao elaborated that although money rates declined alongside last month's reverse repo rate cut, with 1Y CD rates pulling back to around 1.65%, current government bond supply pressure and post-deposit-rate-cut bank deposit migration issues maintain structural liability-side pressures.

"Moreover, by Q1 2025, commercial banks' net interest margins had compressed to a historic low of 1.43%, expected to narrow further after May's rate cut. Overall, banks show limited willingness to compress LPR spreads over reverse repo rates," Zhao noted.

Qing Wang, chief macro analyst at Oriental Gold Rating, also attributed the steady June LPRs to May's synchronized LPR declines following policy rate cuts, with adjustments still transmitting to lending rates. June's unchanged policy rates left LPR pricing spread determinants largely unaffected.

"After the LPR for both tenors fell by 10 basis points each in May, the LPR remained unchanged this month, which was in line with expectations," said Dong Ximiao, Chief Researcher at Merchants Union Consumer Finance and Deputy Director of the Shanghai Finance and Development Lab, in an interview with Caixin reporters. From the perspective of the LPR quoting mechanism, the People's Bank of China (PBOC) has conducted multiple open market operations recently, and the 7-day reverse repo operation rate, which serves as the basis for LPR pricing, remained unchanged at 1.40%. Therefore, it is difficult for the LPR to decline.

"From the perspective of banks, as they continue to reduce fees and charges for the real economy, the pressure on banks' net interest margins (NIMs) is increasing. At the end of Q1 2025, the NIM of commercial banks further declined to 1.43%, a decrease of 9 basis points from the end of Q4 last year, which was faster than expected. Therefore, banks lack the incentive to reduce the spread added to the LPR quotes," Dong Ximiao said.

Industry: LPR Quotes Likely to Remain Stable in the Short Term, with Room for Decline in H2

"We expect that in the short term, we will enter a policy observation period, and the LPR quotes are likely to remain stable," Wang Qing added.

Looking ahead, Wang Qing believes that the external environment in H2 still faces significant uncertainties. In the process of vigorously boosting domestic demand and "promoting the stabilization and recovery of the real estate market with greater intensity," there is still room for the LPR quotes to decline.

Wang Qing analyzed that given that the Sino-US economic and trade negotiations will still undergo a complex and tortuous process, the impact of external environmental fluctuations on exports will mainly manifest in H2. Against the backdrop of low price levels, it is expected that the PBOC will continue to cut interest rates in H2, leading to a decline in the LPR quotes for both tenors. This will guide enterprises and households to lower their lending rates more significantly, reduce the financing costs of the real economy, stimulate endogenous financing demand, and serve as an important driving force for expanding investment, promoting consumption, and mitigating external shocks in H2.

Looking further ahead, Zhao Yi also told Caixin reporters that as the end of the tariff suspension period approaches, to hedge against potential future external demand pressures, it is expected that the PBOC will still maintain loose liquidity operations. The outright reverse repo operations in June have been implemented twice with net injections, and it is expected that the Medium-term Lending Facility (MLF) will also maintain net fund injections. Attention should be paid to the Political Bureau meeting in July for its judgment on the policy tone for H2, and it is not ruled out that subsequent aggregate interest rate cut tools will continue to be used to hedge against tariff pressures.

In addition, considering that policies to stabilize the real estate market need to be further strengthened in H2, especially after the PBOC announced a 0.25 percentage point cut in the housing provident fund loan interest rate on May 7, which has opened up space for a subsequent decline in commercial mortgage interest rates for households, Wang Qing expects that in H2, regulators may push for a more significant decline in household mortgage interest rates by separately guiding the downward movement of the LPR quotes for tenors of five years and above. ""This is a crucial move to alleviate the current issue of relatively high actual mortgage interest rates, stimulate housing demand, and reverse market expectations for the property sector."