The Loan Prime Rate (LPR) for September remained unchanged.

On September 20th, the People's Bank of China authorized the National Interbank Funding Center to announce that the 1-year LPR was 3.35%, and the LPR for terms over 5 years was 3.85%, both unchanged from the previous period.

These LPRs will be effective until the next LPR release.

No interest rate cut!

Why did the September LPR "stand pat"?

Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, stated at a press conference on September 5th that factors such as the speed of bank deposits flowing into wealth management products and the narrowing of bank net interest margins have certain constraints on the further downward trend of deposit and loan interest rates.

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The People's Bank of China will closely monitor the policy effects and reasonably grasp the intensity and rhythm of monetary policy control according to the recovery of the economy, the achievement of goals, and the specific problems faced by the macroeconomic operation.

Orient Gold & Credit believes that the current period is the observation period for the policy effects after the interest rate cut in July.

Considering that the overall downward pressure on the current macroeconomy is controllable and various risks continue to be effectively controlled, there is a condition for the monetary policy to adhere to "my own as the main", and there is not much urgency to continuously cut policy interest rates and guide the LPR quotes to follow suit.

Orient Gold & Credit points out that there are certain constraints on the current interest rate cut.

In the first and second quarters of this year, the net interest margin of banks was 1.54%, narrowing by 0.15 percentage points from the fourth quarter of last year, which is obviously lower than the 1.8% warning level.

If policy interest rates are continuously cut in the short term and guided to follow the LPR quotes, coupled with the large scale of existing housing loan interest rates also having a large room for adjustment, the net interest margin of banks in the second half of the year will face a significant downward pressure, which is not conducive to the stability of bank operations; if the focus is on stabilizing the interest margin and significantly cutting deposit interest rates, it may trigger the risk of bank deposits moving to wealth management products such as financial management on a large scale, which is also not conducive to the stability of bank operations.

Wen Bin, Chief Economist of Minsheng Bank, pointed out that under the new monetary policy framework, the 7-day reverse repo rate will serve as the main policy interest rate, gradually clearing the interest rate transmission relationship from short to long.

In this direction, the LPR quotes will mainly follow the changes of the 7-day reverse repo rate to improve the fairness of the loan benchmark interest rate and further improve the efficiency of interest rate transmission.

At present, the 7-day reverse repo rate remains unchanged, and the LPR follows accordingly.

In addition, the upward trend of market-type liability costs also weakens the effect of deposit cost control, making the downward adjustment of the LPR add-on relatively limited.

Wen Bin believes that after the LPR quote was cut in July, it is still relatively high compared to the actual loan interest rate.

Considering multiple factors such as promoting domestic demand and improving the quality of quotes, there may still be a possibility of lowering the LPR quote within the year.

The probability of short-term interest rate cuts and reserve requirement ratio cuts has increased.

On the 18th local time, the Federal Reserve announced that it will cut the target range of the federal funds rate by 50 basis points, to between 4.75% and 5.00%.

This is the first interest rate cut by the Fed since March 2020, and it also marks the shift of monetary policy from a tightening cycle to an easing cycle.

The People's Bank of China announced on September 18th that the medium-term lending facility (MLF) due on the same day will be renewed on September 25th.

Orient Gold & Credit points out that looking forward, after the Fed has cut interest rates by a significant margin, the domestic monetary policy has expanded its flexible adjustment space, and the probability of short-term interest rate cuts and reserve requirement ratio cuts is increasing.

Wen Bin believes that the Fed has officially announced a rate cut after four years, and the first cut has reached 50 basis points.

There may still be two rate cuts within the year, with a total margin of about 100 basis points, and there may still be a 100 basis point rate cut in 2025.

After the United States starts the interest rate cut cycle, the external constraints on China's monetary policy are reduced, the monetary policy space is opened up, and there is still room and necessity for subsequent reserve requirement ratio cuts and interest rate cuts to further boost the confidence of market entities, enhance the internal momentum of the economy, and promote the realization of the annual economic growth target.