With the recurrence of the epidemic in recent years and the economic downturn, since 2019, except for 2021, there have been interest rate cuts in other years. At present, the market still expects a rate cut in 2023. Will there be another rate cut in 2023? We believe:
First, from a regular perspective, interest rate cuts are needed. Although the epidemic may gradually pass this year, the impact of the three-year recurrence of the epidemic on the economy is objective. When corporate profits decline and residents’ willingness to consume decreases, interest rate cuts are necessary to stimulate the economy. For enterprises, reducing financing costs and increasing profitability will increase the willingness of enterprises to invest; for residents, reducing interest rates on housing loans and consumer loans is also one of the necessary conditions to promote the recovery of housing demand and consumption.
Second, from the perspective of inflation, there are less constraints in the first half of the year. One of the constraints on interest rate cuts is the trend of inflation. Last year, the central bank mentioned its concerns about future inflation many times in its monetary policy implementation report. The logic is that if the economy recovers and demand increases, there will be upward pressure on inflation. However, under the expectation of a global recession, overseas inflation is gradually cooling down, the domestic economy is under pressure in the first half of the year, and the slow pace of improvement in aggregate demand also restricts the rebound of inflation. There is even a risk of deflation in CPI and PPI in the first half of the year. Therefore, even if there is upward pressure on inflation in the future, the constraints imposed by inflation on interest rate cuts in the first half of the year are relatively small.
There is also no constraint on the exchange rate. Last year, the Fed and other major central banks continued to raise interest rates, the U.S. dollar index rebounded, and the renminbi once depreciated to above 7.3, objectively limiting the possibility of interest rate cuts. But this year, the Fed’s interest rate hike will reach its peak, and the U.S. dollar index has fallen ahead of schedule, pushing the RMB to appreciate from 7.3 to below 6.8. Moreover, if the Fed cuts interest rates within this year or the expectation of a rate cut increases, the pressure on RMB appreciation will be greater. Therefore, logically speaking, the downward trend of external demand this year is relatively certain. If the renminbi continues to appreciate rapidly, it will not be conducive to the economy. Therefore, the exchange rate does not restrict interest rate cuts. Even from the perspective of exchange rate, the necessity of interest rate cuts has also increased.
Third, from the perspective of cherishing the space for monetary policy, the central bank will hesitate to cut interest rates. From an absolute level, my country’s benchmark interest rates such as the 7-day reverse repurchase rate and the MLF interest rate are indeed not high, and the reserve requirement ratio has also dropped significantly from the previous high. Logically speaking, before acknowledging the premise that China’s economy will continue to decline significantly in the future, there is relatively little room for my country’s benchmark interest rate to decline, because the central bank has always emphasized the need to cherish the room for normalization of monetary policy. Therefore, since 2020, only 2021 has not cut interest rates. This year is precisely the year when the impact of the epidemic is small and the economy improves because of the base.
Therefore, if the epidemic is gradually easing in 2023, at least from the perspective of the central bank, it will initially believe that the economy will recover, so it will be more cautious about cutting interest rates. Only when the economic recovery is lower than expected, it is possible to cut interest rates. From this perspective, the interest rate cut in 2023 may not be realized at the beginning of the year like in 2022.
The problem of the method of reducing interest rates. We know that the current central bank has many monetary tools, such as OMO and MLF, as well as various structural tools. Judging from the central bank’s various statements at the end of last year, it seems that the central bank has placed more expectations on structural tools. On the one hand, structural tools are more targeted and precise, and on the other hand, flood irrigation is avoided. Therefore, if it is this logic, interest rate cuts may also be reflected in interest rate cuts for structural tools, such as interest rate cuts for certain types of refinancing. In fact, it has also appeared in the past few years.
If it is a rate cut on structural instruments, what impact will it have on bonds? In terms of effect, it is definitely not as obvious as OMO and MLF interest rate cuts on bonds. But it’s not entirely without benefits. In any case, structural tools are also the release of base money. If the interest rates of structural tools are lowered, it will also mean that the cost of debt of banks will decrease; in addition, the use of structural tools is to reduce the loan interest rate of enterprises, and the interest rate from bonds and loans will be lowered. In terms of relative income, if the loan interest rate falls, it will also push up the value of bonds relative to loans in disguise.
Finally, if interest rates are to be cut, is it better to drop early or late? We have previously analyzed in “Learning History as a Mirror, Feeling the Differences in Interest Rate Changes – Looking at the Bond Market from the Bank’s Perspective”. The first quarter is a stage when banks have more funds. The interest rate cut at the beginning of 2022 has created a low interest rate environment. At the same time, the pressure on bank allocation is heavy, which is not friendly to banks. In the first quarter of this year, the market had expectations for economic recovery, which led to a possible rebound in interest rates. If interest rates are not cut, it will be beneficial to the increase in bank allocation income. Therefore, we believe that there is currently an expectation of interest rate cuts, but they have not been fulfilled, and the rhythm is more conducive to banks.
In general, it is not yet possible to judge that interest rates will not be cut this year. On the one hand, it is necessary to cut interest rates. In addition, because the central bank’s economic expectations have become more optimistic, and the room for monetary policy normalization is superimposed, the central bank will also hesitate to cut interest rates. . However, the market has expectations of interest rate cuts, and then does not issue them. From the rhythm, it is more beneficial for banks to increase their allocation income. We suggest that we can adopt the method of waiting for a rabbit, actively deploy the first quarter, and use the stage of rising interest rates to increase the intensity of allocation.