Fitch Ratings agency has adjusted its forecast for a rate cut in China, pushing back its expectations to next year instead of this year. The decision comes as a result of high interest rates set by the U.S. Federal Reserve, which has influenced China’s monetary policy. Concerns over the exchange rate against the U.S. dollar have played a significant role in this decision, as changing expectations for the Fed have made the People’s Bank of China more cautious.
The Federal Reserve’s decision to keep its key interest rate high has put pressure on China to maintain its current one-year medium-term lending facility rate at 2.5% for the remainder of the year. This decision contrasts with previous expectations for a rate cut in 2024. As the Fed shows signs of potentially cutting policy rates in the future, Fitch Ratings anticipates that China will have more flexibility to adjust its own rates in response.
Fitch Ratings’ head of sovereign rating in Asia Pacific, Jeremy Zook, expects Beijing to rely more on fiscal policy this year to stimulate economic growth. However, concerns around bank net interest margins being low pose challenges for the People’s Bank of China (PBOC). The net interest margin is a key measure of bank profitability, and the pressure of capital outflows adds complexity to the current economic environment.
The last time China lowered its one-year medium-term lending facility rate was in August 2023, according to official data. The People’s Bank of China adjusts the MLF every month to guide the benchmark loan prime rate (LPR), which influences lending rates for financial institutions. Governor Pan Gongsheng affirmed that monetary policy would remain “supportive” despite challenges posed by external factors like exchange rates and economic uncertainties.
As major developed economies continue to delay shifts in their monetary policy, China faces ongoing challenges in balancing its domestic economic priorities with external pressures. The impact of a strong U.S. dollar against the Chinese yuan underscores the need for careful consideration in adjusting interest rates. While Fitch Ratings anticipates a rate cut in 2024, current conditions suggest that China will need to closely monitor global economic developments before making any significant changes to its monetary policy.