The central bank cut interest rates three arrows at once, and the pressure on the depreciation of the RMB is expected to ease

According to expert estimates, according to the estimation of the mortgage principal of 1 million yuan, 30 years, and equal principal and interest, the mortgage borrower can save about 200 yuan in interest expenses per month, and the total interest can save more than 70,000 yuan

Text: "Caijing" reporter Tang Jun

Editor|Zhang Wei

On the morning of July 22, the People's Bank of China (hereinafter referred to as the "central bank") cut interest rates "with three arrows".

At 8 o'clock on the same day, the central bank announced, "In order to further strengthen counter-cyclical adjustment and increase financial support for the real economy, from now on, the open market 7-day reverse repo operation (OMO) interest rate will be adjusted from the previous 1.80% to 1.70%. Previously, Pan Gongsheng, governor of the central bank, had said that the interest rate has basically assumed the function of the main policy interest rate.

At 8:30, the central bank announced that the collateral for medium-term lending facility (MLF) operations will be appropriately reduced, aiming to increase the scale of tradable bonds and ease the pressure on supply and demand in the bond market.

At 9 o'clock, the central bank announced the latest loan prime rate (LPR): 1-year, 5-year and above LPR were reduced by 10bp (basis points) to 3.35% and 3.85% respectively. At the same time, the LPR release time was brought forward by 15 minutes to 9 o'clock.

In the afternoon of the same day, the SLF (Standing Lending Facility) interest rate table released by the central bank showed that from now on, the SLF interest rate will be reduced by 10bp to 2.55%, 2.70% and 3.05% respectively from overnight, 7 days and 1 month. Analysts said that the SLF rate cut was mainly to follow the OMO adjustment.

After the announcement, the offshore yuan quickly fell more than 100bp above 7.29, hitting 7.2958 intraday, and treasury bond futures rose across the board after the open, and as of the close, the main contracts of 5-year, 10-year and 30-year treasury bond futures rose 0.21%, 0.27% and 0.33% respectively.

"The core of these three policies is to reduce the overall interest rate level, while improving the transmission efficiency of interest rate cuts." Zeng Gang, director of the Shanghai Finance and Development Laboratory, said that the communiqué of the Third Plenary Session of the 20th Central Committee held recently pointed out that "emphasizing the unswerving realization of the annual economic and social development goals", the central bank's interest rate cut is a specific manifestation of the macro policy force in the second half of the year, and more policies may be introduced in the future.

It is worth noting that in the past, LPR adjustments were usually based on the MLF interest rate as the "anchor", but this time it is a follow-up adjustment after the OMO rate cut. Ming Ming, chief economist of CITIC Securities, believes that the central bank's move further strengthens the status of the OMO interest rate as the benchmark policy rate, while the binding relationship between the LPR and the MLF interest rate is weakened.

"The temporary positive and reverse repo rates in the early stage are determined on the basis of the 7-day reverse repo operation interest rate, plus the optimization of today's open market operation bidding method, which has shown that the central bank has clarified the 7-day reverse repo operation interest rate as the main policy rate." Sources close to the central bank said.

It is worth noting that the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization" issued on July 21 pointed out that "accelerate the improvement of the central bank system and smooth the monetary policy transmission mechanism". In this regard, Lin Yingqi, a banking analyst at CICC, believes that the monetary policy framework is expected to be further improved, including the policy role of diluting the MLF interest rate and lowering the LPR interest rate.

LPR changes "anchor": the main policy rate is clear

The OMO rate cut comes 11 months after the last time the central bank adjusted its policy rate.

On August 15, 2023, the central bank announced the reduction of three policy interest rates, which in turn led to an asymmetric reduction in the market interest rate LPR. Among them, the OMO interest rate and SLF interest rate were reduced by 10bp respectively, and the MLF rate was reduced by 15bp.

On July 22, 2024, the central bank announced that it would adjust the OMO interest rate from the previous 1.80% to 1.70% with immediate effect. Subsequently, the LPR of both maturities was lowered by 10bp.

"The reverse repo operation interest rate was lowered on the LPR quotation date, and the binding relationship between the LPR and the MLF interest rate was weakened, further strengthening the position of the 7-day reverse repo operation rate as the benchmark policy interest rate." Mingming.

On June 19, Pan Gongsheng, governor of the central bank, said in his speech at the Lujiazui Forum, "In the future, we can consider clearly taking a short-term operating interest rate of the central bank as the main policy rate. The interest rates of other maturities monetary policy instruments can dilute the color of the policy rate and gradually straighten out the transmission relationship from short to long. ”

"This means that there is a major adjustment in the policy interest rate system," Wang Qing, chief macro analyst of Oriental Jincheng, believes, "The MLF operating interest rate remained unchanged in July, and the 7-day reverse repo rate was lowered by 10bp, which means that the first policy interest rate cut was launched after a major adjustment in the policy interest rate system." ”

At the same time, the central bank said in the announcement that in order to optimize the open market operation mechanism, the OMO bidding method will be adjusted to "fixed interest rate, quantity bidding". In Wang Qing's view, this means that there is no need to announce the level of the OMO interest rate through reverse repo operations on a daily basis, which will help strengthen its authority and further clarify the status of its main policy rate.

In fact, this is the second time in recent times that the central bank has optimized its open market operations. On July 8, the central bank announced the establishment of a temporary positive repo and reverse repo mechanism, and clarified that the temporary positive and reverse repo operation interest rates were 20bp minus 20bp and 50bp plus 7-day reverse repo operation interest rate respectively.

"The temporary positive and reverse repo rates in the early stage are determined on the basis of the 7-day reverse repo operation interest rate, plus the optimization of today's open market operation bidding method, which has shown that the central bank has clarified the 7-day reverse repo operation interest rate as the main policy rate." A source close to the central bank said, "The LPR reported on the same day reacted quickly, following the adjustment of the 7-day reverse repo operation interest rate at the same range, which also indicates that the LPR quotation has shifted to refer more to the central bank's short-term policy rate, and the short-term and long-term interest rate transmission relationship is gradually straightening out." ”

It is worth noting that in his speech at the Lujiazui Forum, Pan Gongsheng mentioned that "we will continue to reform and improve the LPR, and focus on improving the quality of LPR quotations in view of the fact that some quotation rates significantly deviate from the actual best customer interest rates, so as to more truly reflect the interest rate level of the loan market."

In this regard, Ming Ming said that since the beginning of this year, the proportion of LPR reduction points in the general loan issuance interest rate has exceeded 40%, indicating that the role of LPR as the best loan interest rate is decreasing.

According to sources close to the central bank, the current LPR quotation reform plan is being formulated. Recently, the central bank's competent media issued an article saying that industry experts pointed out that there is a certain deviation between the current LPR quotation and the loan interest rate of the best quality customers, and it is necessary to strengthen the assessment of the quality of quotations in the future to reduce the deviation. Consideration could also be given to using short-term market rates such as SOFR (Secured Overnight Financing Rate) as the benchmark for pricing floating lending rates, drawing on international experience.

The pressure on the RMB exchange rate is expected to ease

On the same day that the central bank cut interest rates, the foreign exchange market and the bond market were adjusted.

Among them, the offshore renminbi depreciated by more than 100bp against the US dollar, falling below the 7.29 mark, and fluctuated above 7.29 for most of the time, while the onshore renminbi depreciated to 7.2750 against the US dollar in early trading, and then rebounded slightly, and the depreciation remained around 50bp.

In terms of the bond market, on July 22, the main contracts of treasury bond futures of various maturities opened higher and moved higher. As of the close, the price of the main 10-year treasury bond futures contract reached 105.715 yuan, a record high. In terms of spot bonds, the yields of many active treasury bonds fell, corresponding to the rise in the price of treasury bonds. Among them, the 10-year treasury bond active bond "24 interest-bearing treasury bond 04" fell to about 2.24%, and the yield of the 30-year treasury bond active bond "23 interest-bearing treasury bond 23" fell to about 2.45%.

On July 19, the Party Committee of the Central Bank held a meeting to convey and study the spirit of the Third Plenary Session of the 20th Central Committee of the Communist Party of China, and the meeting proposed to "enhance the flexibility of the exchange rate".

Lin Yingqi said that since the second quarter of 2023, the statement on the exchange rate at the regular monetary policy meeting has emphasized "resolutely guarding against the risk of large fluctuations in the exchange rate", and no longer mentions "enhancing the flexibility of the RMB exchange rate".

"It is expected that the RMB exchange rate is expected to enter two-way fluctuations in the context of rising expectations of overseas interest rate cuts, thereby reducing the stability of the carry trade." Lin Yingqi said, "In the context of two-way fluctuations in the RMB, interest rate tools are also expected to be more flexible, which will open up room for interest rate cuts, and the interest rate cut on July 22 is in line with this policy idea." ”

In fact, a number of analysts said that an important background of the central bank's interest rate cut this time is that the Fed's expectations of a rate cut in September have risen, and the dollar index has weakened.

In addition, on July 21, local time, the current President of United States Biden announced that he would withdraw from the 2024 presidential race, and the election of his rival Trump was considered a high probability event.

"Trump does not want to see a dollar that is too strong, and has repeatedly criticized that the dollar exchange rate is overvalued." Zeng Gang believes that "if Trump is elected, the Fed's interest rate cut and the change in the attitude of the new ruling team towards the dollar, in the medium and long term, the external depreciation pressure on the RMB exchange rate is gradually easing." ”

Looking ahead, Zeng Gang believes that China's monetary policy will continue to adhere to the principle of "focusing on me", and at the same time dynamically adjust according to changes in the external environment.

Regarding the trend of the bond market, the central bank's competent media recently issued a reminder that the interest rate of long-term bonds has been at a historical low, and the downside space for interest rate cuts in the future is limited.

After today's announcement of the OMO interest rate cut, the central bank announced that in order to increase the scale of tradable bonds and ease the pressure on supply and demand in the bond market, starting from this month, MLF participating institutions that need to sell medium and long-term bonds can apply for a phased reduction of MLF collateral.

In Mingming's view, the central bank's phased reduction of MLF collateral will help balance the supply and demand of long-term bonds, aiming to strengthen the management of long-term interest rates while cutting interest rates at the short end.

"Treasury bonds are the main component of MLF collateral, which means that the current policy is increasing the supply of treasury bonds in the secondary market, guiding the yield of long-end treasury bonds to rise moderately, while maintaining the normal upward slope of the yield curve, controlling the inversion of the interest rate differential between China and the United States, and alleviating the depreciation pressure on the RMB due to the central bank's interest rate cut." Wang Qing expects that the central bank's interest rate cut itself will not increase the pressure on the depreciation of the RMB exchange rate.

The interest rate of the existing mortgage has been reduced by 35bp

With the 10bp reduction in the LPR of 5 years and above, the new and existing housing loans are expected to be lowered simultaneously.

This is the second time that the LPR of 5 years and above has been lowered this year. On February 20, the central bank announced that the LPR of more than 5 years was 3.95%, down 25bp from the previous 4.20%, which was the largest reduction in the history of the interest rate. After this adjustment, the latest LPR of 5 years and above is adjusted to 3.85%, and the cumulative reduction during the year has reached 35bp.

Analysts said that until the next mortgage repricing date (usually January 1 of each year), existing mortgage borrowers will enjoy the benefits of a 35bp interest rate cut, reducing the pressure on mortgage interest payments. According to expert estimates, according to the estimation of the mortgage principal of 1 million yuan, 30 years, and equal principal and interest, the mortgage borrower can save about 200 yuan in interest expenses per month, and the total interest can save more than 70,000 yuan.

New home buyers will also benefit.

According to the central bank's previous disclosure, except for Beijing, Shanghai and Shenzhen, the rest of the cities across the country have canceled the lower limit of mortgage interest rates. At present, the lower limit of the interest rate of the first home loan in Beijing, Shanghai and Shenzhen is not lower than the corresponding term LPR-45bp. After the LPR cut, the lower limit of the first home loan interest rate in the three cities is expected to be reduced to 3.4%.

In addition, since the central bank announced the cancellation of the lower limit of the mortgage interest rate policy on May 17, the interest rate of new mortgages has fallen significantly. According to central bank data, the national average new mortgage interest rate in June was 3.45%, down 66bp year-on-year and 17bp month-on-month, which was at the lowest level in history.