China's central bank has announced that the Loan Prime Rate for July remains steady.

The 1-year LPR is set at 3.0% and the 5-year and above LPR at 3.5%. These rates will be effective until the next announcement.

An analysis from CITIC Securities indicates the central bank's current focus is on reducing comprehensive financing costs, rather than directly employing benchmark interest rate cuts.

Meanwhile, a research team from Dongfang Jincheng forecasts the possibility of a policy-driven interest rate cut in the second half of the year, which would subsequently lead to a reduction in LPR quotations.

Analysis of the Current LPR Hold

The July LPR quotations have remained unchanged. The CITIC Securities team notes that since the 10-basis-point cut in May 2025, which followed a reduction in the reverse repo rate, key interest rates have stabilized. The 7-day reverse repo rate has seen no further adjustments, and the spreads for the 1-year and 5-year LPR over the reverse repo rate have held steady at 1.6 and 2.1 percentage points, respectively.

The Dongfang Jincheng team explains that the unchanged LPR for both tenors aligns with market expectations, citing two primary reasons. First, the pricing benchmark remained stable, as the central bank's key policy rate was unchanged since the last LPR announcement. Second, quoting banks currently lack the motivation to actively reduce the LPR spread. Recent data shows a rise in wholesale funding costs for commercial banks in the interbank market. Crucially, the net interest margin for commercial banks hit a new historical low of 1.40% at the end of the first quarter, squeezing profitability and reducing the incentive for banks to lower lending rates voluntarily.

Monetary Policy in an Observation Phase

The Dongfang Jincheng team suggests that the stable LPR since the start of the year reflects a period of policy restraint, supported by a strong economic start in Q1 and robust export growth. This indicates that monetary policy is currently in a watchful phase, which is the fundamental reason for the unchanged policy rate and LPR in July.

The CITIC Securities analysis highlights that the central bank's monetary policy committee, in its second-quarter meeting, reiterated its focus on keeping overall financing costs low. The committee continued to emphasize standardizing credit market practices and reducing intermediate financing fees, indicating a preference for comprehensive cost reduction measures over direct rate cuts.

Official Focus on Comprehensive Financing Costs

At a recent press conference, central bank officials reiterated the push to maintain low comprehensive financing costs. Measures include a 0.25-percentage-point cut in the interest rates of structural monetary policy tools at the beginning of the year, ongoing efforts to clarify and reduce corporate loan costs, and strengthening the supervision of interest rate policy implementation.

Officials also noted a shift in financing structure in the first half of the year, with a slowdown in RMB loan growth but a significant increase in corporate bond financing. They advised observing the combined total of loans and bonds for a complete picture of real economy financing, alongside indicators like interest rates and financing structure.

Outlook for the Second Half of the Year

The Dongfang Jincheng team judges that a policy rate cut in the second half is likely, which would prompt a corresponding LPR reduction. This expectation is based on potential headwinds for export growth, the need to bolster domestic demand, and favorable conditions for monetary policy adjustment, including moderate inflation and a stable-to-strong yuan exchange rate. They anticipate a potential 10-basis-point policy rate cut around the end of the third quarter, which would lower market rates including LPR and help reduce financing costs for businesses and households.

Finally, the team emphasized the importance of stabilizing the real estate market. They suggested that significant targeted reductions in the 5-year+ LPR, possibly combined with fiscal interest subsidies, could be key to lowering effective mortgage rates, stimulating housing demand, and improving market sentiment.