Deposit rates will continue to decrease further Many industry experts believe that it is highly likely that deposit rates will continue to decrease further this year. It is worth mentioning that in recent days, several small and medium-sized banks such as Guilin Bank, Liuzhou Bank, Yushu Rural Commercial Bank, and Huadian Rural Commercial Bank in Guangxi and Jilin have intensively announced deposit rate reductions, which include a variety of deposit products such as demand deposits, fixed deposits, and large-denomination certificates of deposit, involving various terms, with the general reduction ranging between 10 to 60 basis points. For instance, on February 21, Jilin Huadian Rural Commercial Bank announced that from midnight on February 22, 2024, it has decided to uniformly adjust the upper limit execution rates for demand deposits and three-year and five-year fixed-term deposits, that is to reduce the demand deposit rate from the current 0.25% to 0.2%, a reduction of 5 basis points; and to reduce the three-year and five-year term rates from the current 2.8% to 2.7%, both by 10 basis points. However, Zhou Maohua believes that the recent reduction in deposit rates by small and medium-sized banks mainly follows the third round of rate cuts by major banks last year. The stepwise reduction of deposit rates by large, medium, and small banks in China allows the market to fully digest the impact of the deposit rate cuts, which helps maintain normal competitive order in the deposit market. At the same time, regarding the trend of deposit rates in the latter part of this year, Zhou Maohua indicates that currently, long-term deposit rates are still higher than the average market interest rate and six-month wealth management yield. The proportion of fixed deposits remains high, and some banks still face significant pressure on net interest margins, hence there is still room for further reduction in bank deposit rates. However, the magnitude of the reduction in deposit rates this year is expected to be narrower than last year.Song Yanchen believes that in terms of deposit interest rates, the Central Bank's fourth quarter monetary policy implementation report for 2023 points out that it will "continue to advance the marketization of deposit interest rates to drive down the overall interest rate level," meaning that a reduction in deposit interest rates is a medium to long-term direction, with further cuts to deposit rates still possible within the year. Wang Dan says that despite the Central Bank providing liquidity support through tools such as reserve requirement ratio cuts and open market operations, to alleviate the narrowing of banks' interest margins, the possibility of further reductions in deposit rates this year is not ruled out. There is still at least 10bp of room for rate cuts Experts also unanimously believe that there is still room for future rate cuts, which may likely happen around the middle of the year. Wang Dan notes that due to weak domestic demand, there is still an expectation of interest rate cuts in the market. However, one or two minor rate cuts cannot really boost market confidence; it requires multiple significant cuts. Yet, to protect banks and the exchange rate, monetary policy cannot significantly loosen. From the perspective of achieving the economy's potential growth rate, there is still a need to further lower real interest rates. It is expected that within the year, the MLF (Medium-term Lending Facility) rate still has 10-20bp of rate cut room. Song Yanchen believes that to initiate the second rate cut within the year, it is important to pay attention to the economic data of the first quarter after the vacuum period, as well as the progress of monetary policy shifts overseas.
Zhang Aoping thinks that if the economy remains weak in the long term, with the PMI continuously in the contraction zone, then there is still significant scope for rate cuts in 2024, with the five-year LPR potentially having at least a 25bp cut. As the recent significant reduction of 25bp in the five-year LPR, monetary policy should enter a period of efficacy observation, with weak possibilities for short-term cuts, and a new round of observation for adjustment may be around mid-year.
At the same time, regarding the outlook for future monetary policy, Wen Bin believes that there is definitely still room for subsequent monetary policy this year. In the first quarter of this year, the Central Bank increased countercyclical policy measures and acted proactively mainly to consolidate and enhance market confidence as well as the upward trend in economic recovery, in preparation for a reasonable range of economic operations throughout the year.
Wen Bin believes that the implementation of future monetary policy will depend on three factors. First, it needs to be coordinated with the macroeconomic situation of each quarter within the year. Last year, our economic growth target was 5.2%, mainly because of the low base in 2022, but if the economic growth target for this year is set at around 5%, there may still be some pressure, and the stabilization of the economy each quarter needs to be monitored.
Secondly, subsequent changes in price levels must be considered. Last year, although we experienced two rate cuts, the trend of prices was still quite depressed, especially with the GDP deflator being negative, which also impacted the reduction in real interest rates. The market generally expects a moderate rebound in inflation this year, so the space for later monetary policy also needs to take changes in price levels into account.
Lastly, regarding the external environment, although the market generally anticipates that a Federal Reserve rate cut is highly probable, there is still some disagreement over the timing and frequency of the rate cuts, making it difficult to accurately predict its monetary policy. Overall, our monetary policy for the rest of this year will continue to adhere to the principle of "self-reliance", and will consider the macroeconomic performance and changes in major economic indicators later on.
Zhang Aoping also pointed out that the current external environment still holds uncertainties. Since the decline in U.S. inflation in January was smaller than expected by the market, the probability of short-term rate cuts by the Federal Reserve has gradually decreased, which may pose certain constraints on the recovery of our external demand. Amidst external uncertainties, our domestic macroeconomic policies need to be more "self-reliant" and proactive, expanding domestic demand to drive the economy towards a self-sustaining recovery.
He predicts that in 2024 macroeconomic policies will continue to intensify, monetary policy will become more flexible, and there will be increased "precision irrigation" towards the economic weak links and industry directions that form new quality productive forces.
