Fitch delays China rate cuts as Fed keeps interest rates steady

BEIJING — Ratings agency Fitch no longer expects China to cut its interest rate this year and has postponed its cut expectations until next year as the U.S. Federal Reserve keeps its interest rates high.

Fitch now forecasts China will keep its one-year medium-term credit facility (MLF) unchanged this year at 2.5% and cut it to 2.25% next year. In March, the ratings agency forecast one downgrade for 2024.

“There are several factors behind this. First, on the external side, concerns about the exchange rate against the US dollar due to changing expectations about the Fed are holding back economic growth. [People’s Bank of China]” said Jeremy Zook, head of sovereign ratings for Asia-Pacific at Fitch Ratings, during a presentation on Wednesday.

Next year, “as the Fed starts cutting interest rates, we think that should give the PBOC a little more wiggle room,” he said. Zook expects Beijing to use fiscal policy more aggressively this year.

Last week, the Fed kept its key interest rate unchanged and announced only one cut by the end of the year. That contrasts with investors’ expectations heading into 2024 that the Fed would soon ease monetary policy after aggressively raising rates.

The Fed’s tightening policy kept the US dollar strong against CNY, which is close to a repeat of the low last seen in 2008, according to Wind Information. The weakening of the Chinese currency increases the pressure of capital outflows.

“In addition, there appears to be concerns about banks’ net interest margins being quite low, and this is also creating problems for the PBOC,” 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 must pay on deposits.

China last cut its annual MLF 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 to determine the prime lending rate (LPR).which is the main benchmark for financial institutions’ lending rates.

PBOC Governor Pan Gongsheng said in a speech earlier Wednesday that monetary policy would remain “supportive” and noted that the yuan exchange rate “has remained largely stable under difficult circumstances,” according to a CNBC translation Chinese transcript.

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