Minsheng Securities: Policy signal that LPR will not be lowered

The unchanged LPR in September does not mean that the policy will continue to remain firm. With the 50bp rate cut by the Federal Reserve in September landing, it is indeed somewhat surprising that the domestic LPR remained unchanged today. We tend to believe that the current policy intensity may be more crucial. Especially considering that the economy in September may further slow down compared to August, it is necessary to introduce policies at the end of the third quarter or the beginning of the fourth quarter to "strive to achieve" the annual target. More importantly, a systematic and coordinated "combination punch" is needed, which may be the important reason why the LPR did not temporarily decrease today.

Historical experience: Overseas rate cuts lead to domestic monetary easing, but the pace is not completely synchronized. In the two typical overseas rate cut cycles before (2008, 2019-2020), domestic monetary policy also shifted towards easing, but in these two experiences, the pace of domestic monetary easing was slightly later than that of overseas.

Practical consideration: Overseas rate cuts are a "necessary but not sufficient" condition for domestic monetary easing. The July Politburo meeting mentioned "increasing adverse impacts from changes in the external environment" and "timely reserve and introduction of a batch of incremental policy measures", which may imply that monetary easing to offset potential geopolitical pressures is also an important choice. Therefore, the implementation of monetary easing not only considers external constraints but may also focus more on internal growth stability.

Specific operations: The central bank considers multiple targets and the pace of easing varies. Since the beginning of the year, the central bank has considered at least three aspects: 1) exchange rate stability under high overseas interest rates; 2) financial stability after the narrowing of bank interest rate spreads; 3) preventing idle funds from circulating. Therefore, when it comes to specific implementation, monetary easing may not be achieved "overnight".

RRR cuts, rate cuts on reverse repos/MLF may come first. On one hand, with the substantial landing of the Federal Reserve's policy shift, the onshore RMB exchange rate has fallen significantly from 7.27 two months ago to 7.06, creating room for domestic easing; on the other hand, DR007 has been running near policy rates, and M2 growth has significantly converged towards nominal GDP growth. Maintaining loose liquidity, lowering short-term rates, not only signals easing but also helps maintain a steep yield curve.

Adjustments to existing home loan rates may follow. The accelerated negative growth of social zero growth above the quota in August, with some first-tier cities experiencing cumulative year-on-year negative growth in social zero in the first half of the year, may further strengthen consumption policies. Considering that in some cities such as Beijing, Shanghai, and Shenzhen, there is a significant gap between existing home loan rates and new home loan rates, high interest payments by some residents may affect their consumption capacity, and adjustments to existing home loan rates may follow suit

The downward adjustment of LPR within the year may not be "superimposed" with the adjustment of existing housing loan interest rates. Similarly, in August 2023, the 5-year LPR "yielded" to the announcement of the adjustment of existing housing loans at the end of the same month. We have calculated the impact of several possible ways of reducing existing housing loan rates on bank interest margins:

First, a "one-step" approach, directly reducing existing housing loan rates to the new level, is expected to impact bank interest margins by around 9 basis points, with subsequent deposit rate cuts only partially offsetting it.

Second, a "peak shaving" approach, reducing existing housing loan rates to the level of 5-year LPR + 0, is expected to impact bank interest margins by around 4 basis points, which can be offset by subsequent deposit rate cuts.

Third, if the "peak shaving" of existing housing loan rates within the year is combined with the adjustment of 1-year LPR before and after the rate cut, both are expected to collectively impact bank interest margins by around 9 basis points, with subsequent deposit rate cuts partially offsetting it.

In order to balance the reduction of social financing costs and stabilize bank interest margins, it may be the optimal choice at present to first reduce existing housing loan rates and then reduce the 1-year LPR.

Author: Ta Chuan from Minsheng Securities (SAC License No.: S0100524060005), Source: Chuan Yue Global Macro, Original Title: "Policy Signal of Unchanged LPR (Minsheng Macro Ta Chuan Team)", with some deletions by Wall Street News