People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China, September 28, 2018.
Jason Lee | Reuters
BEIJING – Ratings agency Fitch no longer expects China to cut its benchmark interest rate this year and has postponed its expectations of a cut until next year as the U.S. Federal Reserve keeps interest rates high.
Fitch now forecasts China will keep its one-year medium-term lending facility (MLF) unchanged at 2.5% this year and cut it to 2.25% next year. In March, the rating agency forecast a reduction for 2024.
“There are several factors behind this. First, on the external side, concerns about the exchange rate against the US dollar are slowing down due to changing expectations of the Fed [People’s Bank of China]said Jeremy Zook, head of Asia Pacific sovereign ratings at Fitch Ratings, during a presentation on Wednesday.
“If the Fed starts cutting interest rates next year, we think that should give the PBOC a little more room to maneuver,” he said. Zook expects Beijing to step up fiscal policy measures this year.
The Fed stuck to its key interest rate last week and only hinted at a rate cut by the end of the year. This contrasts with investor expectations for 2024 that the Fed will soon ease monetary policy after aggressive interest rate hikes.
The Fed’s tighter policies have kept the US dollar strong against the US dollar Chinese Yuan, which is close to reaching lows last seen in 2008, according to Wind Information data. A weaker Chinese currency increases pressure on capital outflows.
“There also seems to be concerns that banks’ net interest margins are quite low, and this also poses challenges for the PBOC,” Zook said. Net interest margin (NIM) is a measure of a bank’s profitability as it calculates the difference between the interest the financial institution receives from borrowers and the amount it has to pay on deposits.
The last time China cut the one-year MLF was in August 2023, according to official data accessed by Wind Information.
The People’s Bank of China sets the MLF every month and uses it as a benchmark for the Loan Prime Rate (LPR), which is the main reference for lending rates of financial institutions.
PBOC Governor Pan Gongsheng said in a speech earlier Wednesday that monetary policy would remain “supportive,” noting that the yuan’s exchange rate had “maintained fundamentally stable under complex circumstances,” according to a CNBC translation of the Chinese transcript.
He noted that major developed economies have repeatedly postponed a change in their monetary policies and that “the interest rate differential between China and the US remains at a relatively high level.”
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2024-06-19 10:11:53
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