People walk in front of the headquarters of the People's Bank of China (PBOC), China's central bank, in Beijing on September 28, 2018.
Jason Lee | Reuters
BEIJING — Ratings agency Fitch no longer expects China to cut interest rates this year, postponing any forecast cut until next year as the U.S. Federal Reserve keeps rates high.
Fitch now expects China to keep its one-year medium-term lending rate (MLF) steady at 2.5% this year and then cut it to 2.25% next year. In March, the ratings agency had forecast one cut in 2024.
“There are several factors behind this. First, externally, concerns about the U.S. dollar exchange rate have been driven by changing expectations of the Fed. [People’s Bank of China]”We are seeing a surge in interest rates in the second half of this year, and we are seeing a surge in interest rates in the third quarter,” Jeremy Zook, head of sovereign ratings for Asia Pacific at Fitch Ratings, said in a presentation on Wednesday.
Next year, “the Fed will start to cut interest rates, which should give the PBOC a bit more room to maneuver,” said Mr. Zook, who expects Beijing to use fiscal policy more aggressively this year.
The Fed kept its key interest rate unchanged last week and signaled just one rate cut before the end of the year, contrasting with investor expectations heading into 2024 that the central bank will ease monetary policy soon after aggressive rate hikes.
The Fed's tight monetary policy has kept the U.S. dollar strong against the Chinese yuan, which is nearing its lowest level since 2008, according to data from Wind Information. A weaker yuan would increase pressure for capital outflows.
“There also seems to be some concern that banks' net interest margins are quite low, which is also a challenge for the PBOC,” Zook said. Net interest margin (NIM) calculates the difference between the interest rates financial institutions receive from borrowers and the interest rates they pay on deposits, and is a measure of a bank's profitability.
The last time China cut its one-year MLF was in August 2023, according to official data obtained through Wind Information.
The People's Bank of China sets the MLF every month and uses it as a guide to the benchmark lending prime rate (LPR), which is the main basis for lending rates for financial institutions.
Monetary policy remains “supportive” and the yuan exchange rate “remains basically stable under complex circumstances,” People's Bank of China Governor Pan Gongsheng said in a speech early on Wednesday, translated from Chinese by CNBC.
He noted that major developed countries have repeatedly postponed monetary policy shifts and “the interest rate gap between China and the United States remains at a relatively high level.”