People walk near the headquarters of the People's Bank of China, the central bank, in Beijing, China, September 28, 2018.
Jason Lee | Reuters
BEIJING – Fitch Ratings no longer expects China to cut interest rates this year, and has postponed its cut forecast to next year as the US Federal Reserve keeps interest rates high.
Fitch now expects China to keep its one-year medium-term lending facility unchanged this year at 2.5%, then reduce it to 2.25% next year. In March, the rating agency forecast one cut for 2024.
“There are two factors behind this,” said Jeremy Zook of Fitch Ratings. “First, on the external side, concerns about the exchange rate against the US dollar, due to changing expectations for the Federal Reserve, are constraining (the People’s Bank of China).” The head of Asia-Pacific sovereign ratings said during a presentation on Wednesday.
Next year, “when the Fed starts cutting interest rates, we think that should give the People's Bank of China more room to maneuver,” he said. Zook expects Beijing to benefit more from fiscal policy this year.
The Fed last week kept its key interest rate steady and signaled just one cut by the end of the year. This contrasts with investors' expectations heading into 2024 that the Fed will ease monetary policy soon after aggressively raising interest rates.
The Fed's hawkish policy has kept the US dollar strong against the US dollar Chinese yuan, which is close to retouching lows last seen in 2008, according to Wind Information data. The weakness of the Chinese currency increases the pressure on capital outflows.
“There also appear to be concerns about banks' net interest margins falling significantly, and this also poses challenges for the People's Bank of China,” Zook said. Net interest margin (NIM) is a measure of a bank's profitability because it calculates the difference between the interest a financial institution receives from borrowers and the amount it has to pay on deposits.
The last time China reduced the multilateral fund by one year was in August 2023, according to official data accessed by Wind Information.
The People's Bank of China sets the multilateral fund every month and uses it to guide the base interest rate on loans, which serves as the main reference for lending rates at financial institutions.
In a speech earlier Wednesday, People's Bank of China Governor Pan Gongsheng said monetary policy would remain “supportive” and noted that the yuan's exchange rate “has remained fundamentally stable under complex circumstances,” according to a CNBC translation of the Chinese text. .
He pointed out that major advanced economies have repeatedly postponed the shift in their monetary policy, and that “the interest rate gap between China and the United States remains at a relatively high level.”
