Fitch pushes back on China interest rate cuts as Fed keeps interest rates steady

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 policy rates this year and has pushed expectations down to next year as the U.S. Federal Reserve kept 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 ratings agency forecast a cut in 2024.

“There are a number of factors behind this. First, on the external front, concerns around the exchange rate against the US dollar, driven by changing expectations for the Fed, have limited growth momentum. [People’s Bank of China],” Jeremy Zook, head of sovereign ratings at Fitch Ratings in Asia Pacific, said during Wednesday’s presentation.

Next year, “when the Fed starts cutting policy rates, we think that will give the PBOC more room to maneuver,” he said. Zook expects Beijing to use fiscal policy more this year.

The The Fed last week held steady on the basic interest rate and only cut it once at the end of this year. That’s contrary to investors’ expectations for 2024 The Fed will ease soon monetary policy after a sharp increase in interest rates.

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The Fed’s tighter policy has kept the US dollar stronger against the US dollar. Chinese Yuan, nearing a low last seen in 2008, according to Wind Information data. The weakening Chinese currency increases the pressure on capital outflows.

“There also seem to be concerns around banks’ net profit margins which are quite low and this also poses a challenge for the PBOC,” Zook said. Net profit margin (NIM) is a measure of a bank’s profitability because it calculates the difference between the interest rate a financial institution receives from borrowers and the amount they pay for deposits.

Last China cuts MLF by one year is in August 2023, according to official data accessed through Wind Information.

The People’s Bank of China sets up monthly MLF and Use it to guide the benchmark lending base rate (LPR).This is the main reference for lending interest rates of financial institutions.

PBOC Governor Pan Gongsheng said in a speech earlier on Wednesday that monetary policy would remain “accommodative” and noted that the yuan’s exchange rate “remained essentially stable during these complicated circumstances,” according to CNBC’s translation of CNBC’s financial report. Chinese minutes.

He noted that major developed economies have repeatedly delayed changes to their monetary policies and that “the interest rate gap between China and the US remains relatively high.”

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