Hong Kong Cuts Base Rate After Fed; Banks Seen Staying on Hold
The Hong Kong Monetary Authority cut its benchmark interest rate in line with the U.S. Federal Reserve
(Bloomberg) -- The Hong Kong Monetary Authority cut its benchmark interest rate in line with the U.S. Federal Reserve, a mechanical outcome of the city’s currency peg that’s unlikely to be immediately passed on to the suffering economy.
The HKMA on Thursday lowered its base rate to 2.25% from 2.5%, hours after the Fed’s quarter-point move, according to the monetary authority’s page on Bloomberg. As the Hong Kong dollar is pegged to the greenback, the city essentially imports U.S. monetary policy.
The move probably won’t immediately feed into the cost of credit for businesses and households. HKMA Chief Executive Norman Chan said local banks don’t necessarily need to follow the Fed in a rate cut, because they have their own funding considerations. HSBC Holdings Plc and Bank of East Asia Ltd. are among lenders that have recently raised rates for mortgage loans.
Months of large-scale protests have unnerved investors and consumers and raised the prospect of capital flight. A range of indicators weakened sharply in July and August, signaling the risk that the city will tip into recession. Fitch Ratings Inc. this month downgraded the territory as an issuer of long-term foreign currency debt for the first time since 1995.
The Fed’s cut may not have a direct impact on Hong Kong as Hong Kong dollar interest rates have been lagging U.S. dollar interest rates, HKMA Chief Executive Norman Chan said at a briefing, adding that short-term rate movements would be more affected by changes in the supply and demand of Hong Kong dollar funding. Chan said he wouldn’t be surprised if the government sees the economy shrinking in the third quarter.
“Hong Kong banks are unlikely to follow any Fed cut now, as they’re under certain funding pressure,” said Carie Li, an economist at OCBC Wing Hang Bank Ltd. in Hong Kong. There could be window-dressing activities at banks toward the end of the quarter, and Budweiser Brewing Company APAC Ltd.’s upcoming initial public offering would mop up liquidity, Li said.
“Banks also have to prepare funding for the rest of the year and get themselves ready for the competition with virtual banks. Therefore, their funding pressure will be unlikely to ease up soon,” she said.
To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net;Alfred Liu in Hong Kong at aliu226@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Dominic Lau
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With assistance from Bloomberg