US Interest Rate Hike Over? China Keeps Loosening Monetary Policy
The global economy in 2024 is primarily characterized by three major trends: first, inflation is under control; second, the global economy is in recession; third, the Federal Reserve is forced to lower interest rates; and fourth, the world is re-entering an era of low interest rates.
Is the Federal Reserve planning to lower interest rates, signaling the imminent start of a global rate-cutting cycle?
For China, our path has always been different from that of the United States and Europe. Over the past two years, while the West raised interest rates, we lowered them.
So, now that they are lowering rates, will China continue to do so? Today, let's explore the question of whether China will lower interest rates. Writing is not easy, so welcome likes, shares, and bookmarks.
Will China follow suit as the Federal Reserve opens the door for rate cuts?
Recently, the United States released its CPI and PPI data for December. The CPI data showed a rebound, causing turmoil in the U.S. capital markets for two days because it indicated that U.S. inflation was not under control, and the expected timing for the Federal Reserve's rate cut was pushed back to May.
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Fortunately, yesterday's PPI data revealed that the December PPI figures continued to decline, overturning the market's previous judgment about a resurgence of U.S. inflation. As a result, we see that the probability of the Federal Reserve cutting rates in March has already reached as high as 80%.
Under these circumstances, the Federal Reserve is expected to cut rates at least three times in 2024, with a minimum reduction of 75 basis points. The Federal Reserve will return to its previous rate-cutting cycle and gradually enter an era of low interest rates.
The Federal Reserve is set to cut rates at least three times this year.
Once the United States begins to lower rates, European countries will also follow suit. The European Central Bank's rate-cutting timeline is expected to start around June. European Central Bank President Christine Lagarde has also indicated that once inflation in Europe falls below 2%, she will immediately opt for a rate cut to stimulate the economy.It is almost certain that Western countries will lower interest rates, and most central banks in developing countries will generally follow suit, as they typically have little ability to determine their own country's interest rates and are mostly carried along by the tide, making them some of the most easily harvested countries.
What about China? In 2024, will we raise interest rates or continue to lower them? Judging from the current situation, we will still maintain a loose monetary policy and the pace of interest rate cuts this year.
Will the central bank continue to cut interest rates in 2024?
China's situation is different from that of Western countries. First, Western countries have always followed the monetary policy of the Federal Reserve. When the Fed raised interest rates in the past, Europe and countries around the world followed suit. However, China is different.
After the outbreak of the epidemic in 2020, in order to stimulate the economy, ensure employment and people's livelihoods, we adopted a monetary policy of continuous interest rate cuts and reserve requirement ratio reductions, releasing more liquidity into the market to stimulate the domestic economy.
Domestic interest rates have continuously decreased from 4.31% in 2019 to the current 3.45% (1Y LPR).
And when the Federal Reserve raised interest rates, the domestic economy made good use of institutional advantages to control inflation, so we were able to further stimulate the economy by cutting interest rates while the United States was fighting the inflation crisis, thus providing a bottom for the domestic economy. This led to the situation where the United States raised interest rates while China lowered them.
However, in 2023, the central bank's interest rate cuts became more cautious, with reduced intensity and magnitude. This is because the United States raised interest rates too aggressively, leading to an "inversion" of the interest rate difference between China and the United States, resulting in a series of problems, such as continuous outflow of foreign capital and a lot of funds flowing to the United States to earn high interest rates, instead of returning to the Chinese market.
Therefore, from the perspective of the central bank, the room for further interest rate cuts has become smaller, because if we continue to cut, the speed and magnitude of foreign capital outflow will be greater, which is not conducive to the domestic economy.
However, if the Federal Reserve and Europe, and even the whole world, start to cut interest rates, the previous interest rate inversion phenomenon will ease or even disappear, which will be a very good macro benefit for the Chinese economy.The Federal Reserve's interest rate cut implies that the central bank has more room to maneuver without worrying about an inverted yield curve. This means that as long as we are not satisfied with the growth rate of the domestic economy, we can continue to stimulate the domestic economy through a loose monetary policy, thereby ensuring employment, people's livelihoods, and maintaining the normal operation of the economy. Recently, some domestic banks have already started similar actions.
Is China entering an era of low interest rates?
Starting from 2023, several domestic banks have lowered market interest rates, and commercial banks have entered a "comprehensive interest rate cut" phase. In particular, the returns on long-term financial products have declined across the board. Meanwhile, the central bank has also regulated benchmark interest rates, including the Medium-term Lending Facility (MLF), in policy terms. For example, the current one-year MLF rate is around 2.5%, and the Loan Prime Rate (LPR) is around 3.5%.
At this year's Chief Economist Forum for 2024, some experts also indicated that the central bank has a significant amount of policy space this year, with many tools at its disposal. The central bank can easily cut interest rates by 15 basis points and could even continue to intensify its efforts, implementing substantial interest rate cuts to stimulate the economy.
Other economists have also stated that the reduction in deposit interest rates at the end of last year means that an MLF rate cut this year has essentially become a foregone conclusion. After the deposit interest rate is reduced, there will be a gap between bank interest rates and policy interest rates. It is only logical that the central bank will quickly fill this gap. Therefore, an interest rate cut this year is imminent, with predictions suggesting that there will be a rate cut in January.
If changes in deposits and loans are not synchronized, there will be problems. The bank's profits will be greatly reduced.
So, after the interest rate cut at the beginning of the year, will there be further rate cuts this year? The current probability is also quite high.
As we have said, the main theme for 2024 is a global economic recession. At this time, governments around the world will inevitably choose to carry out counter-cyclical adjustments to avoid their domestic economies weakening and falling into recession. They will inevitably introduce more favorable policies to respond and hedge. Interest rate cuts are a relatively basic and effective means.
For China, as long as the real economy is not overheating, we must not only continue to cut interest rates within the policy space but also need to combine investment, foreign trade, and consumption, the three horses pulling the economy, and continue to increase fiscal adjustments. By combining central bank interest rate cuts, we can stabilize expectations for the real economy.So, in 2024, in order to stimulate the economy, the central bank will inevitably need to maintain an accommodative stance. Once the Federal Reserve lowers interest rates, the policy pressure on the central bank will be reduced, and the intensity and space for easing reserve requirements will be opened up. A certain economist directly predicts that the central bank will cut interest rates by 20 basis points this year, and the reserve requirement ratio, which we refer to as the easing of reserve requirements, will also be lowered by 50 basis points.
The Chief Economist in Shanghai, when judging the Chinese economy, mentioned the issue of interest rates. Therefore, China is actually step by step entering an era of low interest rates. The era of high interest rates and high economic development speed has passed, and we are more likely to use policy space to exchange for higher development speed.
Summary
For China, the necessity of both interest rate cuts and reserve requirement reductions is strengthening, as domestic demand is still relatively weak. We need to rely more on investment and the easing of reserve requirements and interest rate cuts to stimulate economic development.
Coincidentally, this year the Federal Reserve is about to ease interest rates, which gives the central bank more room to lower interest rates. Our policy intensity this year may be much greater than in 2023, so everyone can look forward to more favorable policies.
In summary, the central bank's interest rate policies, and even the Ministry of Finance's fiscal policies, are all in service of the domestic economy. As long as the economic growth rate has not yet reached our planned expectations, the central bank will continue to maintain loose policies. China will always be in a "low interest rate era," and both deposit and loan interest rates will become lower and lower.
The central bank's policies serve the Chinese economy.
In such a low-interest-rate era, even multi-millionaires find it difficult to live off interest from their deposits, and this is an era that none of us have experienced before.
So how do we cope with such an era? China has no experience, so we still need to refer to how ordinary people in Europe, the United States, and Japan coped in the past few years.
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