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Fitch pushes back on Chinese interest rate cut while Fed keeps interest rates stable

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Fitch pushes back on Chinese interest rate cut while Fed keeps interest rates stable

Fitch pushes back on Chinese interest rate cut while Fed keeps interest rates stable, 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 – Credit rating agency Fitch no longer expects China to cut its key interest rate this year, and has pushed back its expectations for a cut to next year as the U.S. Federal Reserve keeps its interest rates high.

Fitch now forecasts that China will keep its one-year medium-term loan facility (MLF) unchanged at 2.5% this year, and cut it to 2.25% next year. In March, the rating agency predicted one downgrade before 2024.

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

Next year, “if the Fed starts cutting policy rates, we think that should give the PBOC some more room to maneuver,” he said. Zook expects Beijing to make greater use of fiscal policy this year.

The Fed held on to its key interest rate last week and signaled just one cut by the end of the year. This is in stark contrast to investor expectations heading into 2024 that the Fed would soon ease monetary policy after an aggressive rate hike.

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The Fed’s tightening policy has kept the US dollar strong against the US Chinese Yuan, which is close to retouching the 2008 lows, according to data from Wind Information. A weaker Chinese currency increases the pressure of capital outflows.

“There also appear to be concerns about the banks’ fairly low net interest margins, and this poses challenges for the PBOC as well,” Zook said. Net interest margin (NIM) is a measure of bank profitability as it calculates the difference between the interest the financial institution receives from borrowers and the amount it has to pay on deposits.

The last time China cut the one-year MLF was in August 2023, according to official data accessed through Wind Information.

The People’s Bank of China sets the MLF every month uses it as a guide to the benchmark loan prime rate (LPR)the main reference for the interest rates of financial institutions.

PBOC Governor Pan Gongsheng said in a speech earlier on Wednesday that monetary policy would remain “supportive,” noting that the yuan exchange rate “has remained basically stable under complex conditions,” according to a CNBC translation of the report . Chinese transcript.

He noted that major advanced economies have repeatedly postponed a change in their monetary policies, and that “the interest rate gap between China and the US remains at a relatively high level.”