＂cut interest rates＂! The latest interpretation is coming.

China Fund News reporter Zhang Yan North Sun Xiaohui

On July 22nd, the central bank announced that it would cut the interest rate of 7-day reverse repurchase operation (OMO) by 10 basis points and reform the 7-day reverse repurchase operation. At the same time, the one-year and five-year LPR are lowered by 10 basis points.

What is the background and reason of this "interest rate cut"? How is the strength compared with the expectation? What impact will LPR downward adjustment bring? Is there room for further easing of subsequent monetary policy?

In this regard, China Fund News reporter interviewed 9 fund companies and analysts, including Bosera, Huashang, Chuangjin Hexin, Morgan Stanley, Hongde, Golden Eagle, Debon, Founder Fubon and AVIC.

The above-mentioned companies generally believe that the downward adjustment of LPR is the latest measure for the steady growth of the central bank and the practical action to implement the deployment of the Third Plenary Session of the 20th CPC Central Committee.

Bosera Fund said that the Third Plenary Session of the 20th CPC Central Committee pointed out that it is necessary to improve the macro-control system and promote reforms in key areas such as finance, taxation and finance as a whole, and one of the key points in deepening the reform of the financial system is to speed up the improvement of the central banking system and smooth the transmission mechanism of monetary policy. The linkage of OMO-LPR interest rate reduction is the landing of the new interest rate transmission mechanism framework of the central bank. With OMO interest rate replacing MLF interest rate as the main policy interest rate, LPR reference benchmark has also been replaced from MLF to OMO.

Secondly, economic and financial data show that China’s economy is still in a weak range. Under the background of downward pressure on fundamentals, it is necessary to loosen monetary policy, thus supporting the real economy. The central bank needs to reduce the debt cost of the banking system and the financing cost of entities by lowering the policy interest rate.

Du Lei, manager of Chinese businessman Ruifeng short-term debt bond fund, also believes that the background of this interest rate cut mainly lies in the weakening of domestic economic momentum since the second quarter of this year. Compared with fiscal policy, monetary policy is more flexible and the effect of interest rate reduction will be more direct.

"The Third Plenary Session of the 20th CPC Central Committee emphasized unswervingly achieving the annual economic and social development goals and actively expanding domestic demand. The unexpected downward adjustment of LPR is the latest measure for the central bank to stabilize growth, and it is also a practical action to implement the conference deployment." Deng Haiqing, deputy general manager and chief investment officer of AVIC Fund, said.

Hongde Fund said that the 7-day OMO interest rate cut was the first adjustment since August 2023. The central bank’s decisive interest rate cut this time shows the determination of monetary policy to protect the economic recovery, and it is a positive response to the requirement of the Third Plenary Session of the 20th Central Committee of the Communist Party of China to "unswervingly achieve the goal of economic and social development throughout the year". Last Friday, the Standing Committee of the State Council held a decision to make overall arrangements for ultra-long-term special treasury bonds, further promote large-scale equipment renewal and trade-in of consumer goods, which also showed that the short-term counter-cyclical adjustment was further strengthened.

Morgan Stanley Fund believes that the current exchange rate pressure has eased, the domestic pressure to achieve economic goals has increased relatively, and the central bank’s demand for stable growth of a wide currency has also increased accordingly. Therefore, this time, the interest rate cut is also relatively restrained, leaving room for the future.

Gan Jingyun, chief macro analyst of Chuangjin Hexin Fund, and Niu Weisong, manager of Founder Fubon’s fixed-income fund, also added that the macro background of this interest rate cut is that the economic data of the second quarter was just released last week. Under the drag of prices, nominal growth is weak, indicating that domestic demand is zero, real estate sales data is weak, and overseas political fluctuations also make external demand face certain risks, and the economy faces great challenges in the second half of the year. In addition, the recent weakening of US economic data has pushed up the expectation of interest rate cuts, and the pressure of the central bank to stabilize the exchange rate has been suspended. The relaxation of external constraints also provides greater space and flexibility for domestic monetary policy.

In response to the adjustment of OMO bidding method, Xia Jintao, general manager of Debon Fund’s fixed income research department, pointed out that "the bidding method is adjusted to fixed interest rate and quantity bidding, and the central bank clarifies the price and the highest total ceiling, which highlights the importance of price-based monetary policy and completely determines the policy interest rate status of the central bank’s OMO interest rate."

The institutions and people interviewed agreed that the interest rate cut was basically in line with expectations, but the timing of interest rate cut slightly exceeded market expectations. Recently, the central bank not only continued to guide the long-term interest rate, but also decided to borrow government bonds for some primary dealers in the open market business in the near future. The central bank’s statement delayed the market’s expectation of interest rate cuts to some extent.

Gan Jingyun believes that the current interest rate cut and the shift in the focus of monetary policy to increase countercyclical adjustment are good for the financial market. While the necessity of steady growth is enhanced, we also see that the policy is intensifying.

For the bond market, Gan Jingyun said that the new capital interest rate center will go down to 1.7%, which is conducive to breaking the constraints of short-term bond interest rates and deposit receipt interest rates, and short-term bonds will go bullish. Pricing the long-term interest rate from the economic fundamentals is still favorable to a certain extent at present, but the central bank hopes that the yield curve will be steep to stabilize the demand for selling long-term bonds and reduce collateral in stages, so the long-term downside may be limited.

Deng Haiqing pointed out that the downward adjustment of LPR is conducive to boosting market confidence, improving market expectations for China’s economy, and thus boosting the capital market. Du Lei and Niu Wei Song agree that the interest rate cut will first directly benefit the bond market, especially the short-term and medium-term bonds.

Hongde Fund believes that LPR is the main reference benchmark for loan interest rate pricing. The decline of LPR can effectively reduce the comprehensive financing cost of the real economy. The reduction of LPR interest rate sends a policy signal of steady growth and development, which is conducive to stabilizing market expectations.

At the same time, the central bank said that in order to optimize the open market operation mechanism, from July 22, the 7-day reverse repurchase operation in the open market was adjusted to fixed interest rate and quantity bidding. According to the analysis of Hongde Fund, the main purpose of this operation may be to send a stronger policy interest rate signal to the market, and it is also the embodiment of improving the market-oriented interest rate regulation mechanism.

Xia Jintao said that the downward adjustment of LPR will obviously narrow the interest rate difference between the existing mortgage and the current interest rate, which will be a more obvious positive for the economy. Lowering the interest rate to reduce the financing cost of the real economy is an important means to expand domestic demand.

Under the background that the current fundamental repair is still not stable, monetary policy will continue to maintain a loose tone.

Xia Jintao believes that oversupply and insufficient effective demand are the main structural contradictions of macroeconomics in the past decade. As a typical East Asian economy, China has traditionally been export-oriented, and increasing the investment rate is the main way to stabilize and stimulate the economy. The path to further promote effective demand and reduce interest rates is relatively clear. This rate cut is more cautious and restrained, which may be due to the net interest margin of banks and the pressure on the exchange rate. After the Fed cuts interest rates, China’s monetary policy space will be further opened.

Gan Jingyu also said that the current focus of monetary policy has shifted from air defense and risk prevention to increasing countercyclical adjustment. The weak domestic fundamentals and overseas entry into a substantial easing cycle in the second half of the year have determined the general direction of interest rate cuts in the long run.

Golden Eagle Fund believes that the LPR is lowered by 10 BP or the result of comprehensive consideration of domestic economy and external exchange rate pressure. The space for subsequent monetary policy easing is restricted by the Fed’s monetary policy rhythm to some extent. If the external constraints are opened, the domestic monetary policy space will be further increased.

Niu Weisong said that the policy direction is fundamentally determined by the macroeconomic trend. This round of interest rate cuts will help to hedge the short-term downward pressure on the economy. However, the economy still faces many uncertainties in the second half of the year. With the Fed’s interest rate cut cycle and the loosening of domestic monetary policy, monetary policy still has room for further easing.

Deng Haiqing also believes that China’s economic development still faces certain internal and external challenges, and it is expected that monetary policy will remain supportive in the future.

In addition, Du Lei said that since the second quarter of this year, the deposit cost of representative banks such as big banks and joint-stock banks has improved by 3-5 BP, which is not enough to drive the adjustment of LPR quotation step in theory. From the perspective of interest margin, with the downward adjustment of OMO interest rate and LPR quotation rate, it is expected that the deposit listing interest rate and self-discipline upper limit may be adjusted during the year.

Audit: Chen Siyang