China's August LPR Holds for Third Month; Mortgage Rates Continue to Fall

(Lead) On August 20, the People's Bank of China (PBOC) authorized the National Interbank Funding Center to publish the latest Loan Prime Rate (LPR): the one-year LPR remained at 3.0% and the over-five-year LPR at 3.5%, both unchanged from the previous month. This marks the third consecutive month that the LPR has been left on hold since June. Although the policy rate did not move, bank-driven pricing under city-specific policies has pushed first-home mortgage rates below 3% in many cities, with some second-home rates also falling to around 3.05%. The market widely believes monetary policy is in an observation period, and that future RRR cuts, structural tools, and rate adjustments may still work in concert. I. Why Has the LPR Been Unchanged for Three Months? From a pricing-mechanism perspective, the LPR is anchored to the seven-day reverse-repo rate. Since the PBOC has kept open-market operation rates stable in August, quoting banks lacked direct impetus to lower their spreads. At the same time, commercial banks' net interest margin remains near a historic low, registering 1.42% in the first half of the year, down another 0.01 percentage point from the first quarter. With funding costs not yet clearly declining and margin pressure still elevated, banks have limited willingness to actively compress their LPR spreads. From a macroeconomic perspective, China's economy was broadly stable and moderately strong in the first half of the year, with second-quarter GDP growth in a reasonable range and exports and manufacturing investment performing well. In the short term, there is limited need to strengthen counter-cyclical adjustment by cutting the LPR. Policymakers prefer to observe the effects of earlier rate cuts, RRR reductions, and real-estate policy packages. Therefore, the August LPR hold was largely in line with market expectations and reflects a transition in monetary policy from "broad-based easing" to "targeted drip irrigation." II. Mortgage Rates Slide in a "Market-Driven" Way Despite the unchanged LPR, mortgage rates have continued to decline. According to surveys by CRIC and other institutions, the average commercial mortgage rate for first homes in 30 major cities has fallen to 3.21%, with first-home rates in Guangzhou and Suzhou already below 3%. In Guangzhou, some foreign banks offer first-home mortgage rates as low as 2.9%, while Standard Chartered and Bank of Guangzhou quote as low as 2.95%, nearly matching the public housing fund loan rate. The average second-home loan rate has fallen to 3.53%, with cities such as Nanjing, Xuzhou, and Changzhou below 3.2%; in Nanjing, some banks offer second-home rates as low as 3.05%, basically on par with first-home rates. This phenomenon of "policy rate unchanged, actual rate lower" stems from two factors. First, the over-five-year LPR has already been cut by a cumulative 35 basis points in February and July, opening room for mortgage-rate declines. Second, after cities removed the lower limit on first-home mortgage rates, banks have actively cut spreads in a "volume-for-price" competitive strategy. For homebuyers, lower rates significantly ease repayment pressure. On a 1-million-yuan, 30-year equal-principal-and-interest loan, a rate drop from 4% to 3.05% reduces the monthly payment by roughly 530 yuan. III. Signals from the Policy Observation Period The LPR hold for three consecutive months sends a clear signal of policy observation. On one hand, the central bank does not want excessive easing to trigger capital arbitrage or asset-price bubbles; on the other, policymakers are awaiting more data to verify the effects of earlier measures, especially key indicators such as real-estate sales, corporate medium- and long-term loans, and household consumption. Pang Xie, a distinguished senior fellow at the National Institution for Finance and Development, noted that the August LPR hold allows subsequent policy measures to be better coordinated, improving implementation effectiveness and targeting. Wen Bin, chief economist at China Minsheng Banking Corp., believes that monetary policy will remain supportive in the second half of the year to stabilize credit, boost domestic demand, and strengthen policy coordination, but the pace and choice of tools will place greater emphasis on "precision and effectiveness." IV. Room for Future RRR Cuts and Rate Reductions Looking ahead, the market generally believes monetary policy still has easing room, but the pace will depend on domestic and external developments. Internally, if the real-economy recovery encounters more bumps or if the real-estate market needs additional support to stabilize, the LPR may still be cut. Externally, if the Fed holds rates steady or sends dovish signals at its September meeting, it would create relatively loose external conditions for China's monetary policy adjustment. In addition to interest-rate tools, structural monetary-policy instruments will continue to play a role. Relending facilities supporting technological innovation, green transition, inclusive small-business finance, and equipment upgrades are expected to expand further or see new variants in the coming months. Moreover, RRR cuts are still seen as an important option to replenish medium- and long-term banking-system liquidity and coordinate with government-bond issuance. If the pace of government-bond issuance accelerates in the fourth quarter, the PBOC may release liquidity through RRR cuts to stabilize market-rate expectations. (Conclusion) The LPR hold for a third consecutive month is both an assessment of prior policy effects and a way to preserve room for future action. Under the combination of "stable policy rate + declining market rates," mortgage rates continue to fall and real-economy financing costs are expected to remain at historic lows. In the next stage, the focus of monetary policy may shift from "lowering prices" to "expanding credit" and "optimizing structure," with structural tools and targeted regulation playing a larger role in stabilizing growth.