Hong Kong's de facto central bank cut its base interest rate for the first time in four years in lockstep with the US Federal Reserve, kicking off a cycle of reductions that would help businesses and homeowners to reboot.
The city's base rate was cut by 50 basis points to 5.25 per cent, according to the Hong Kong Monetary Authority (HKMA). Hours earlier, the Fed slashed its target rate by an unexpectedly aggressive half-point to a range of 4.75 per cent to 5 per cent during its fifth Federal Open Market Committee (FOMC) meeting this year.
The Fed's cut was widely expected, although traders were split about whether the reduction would be by a quarter-point or a half-point, according to data compiled by CME Group, based on Fed fund futures contracts.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"A 50-basis-point cut cannot be discounted given the recent softening in labour market activity and comments by some Fed policymakers to front-load rate cuts", said Allianz Global Investors' global CIO of fixed income Michael Krautzberger, in a research note before the cut. "The Fed, like other central bankers, are now focused on economic growth rather than inflation risks and becoming increasingly worried about being behind the curve on policy - cutting rates too late to avert a recession or sharper growth slowdown".
US Federal Reserve Chairman Jerome Powell during a press conference in Washington DC on September 18, 2024. Photo: Xinhua. alt=US Federal Reserve Chairman Jerome Powell during a press conference in Washington DC on September 18, 2024. Photo: Xinhua.>
A quarter-point cut was fully priced in and expected by the market, based on the CME Group's futures contracts, while only a third of traders were looking for a 50-basis-point reduction.
"This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 per cent", Fed Chairman Jerome Powell said, after the FOMC's 11-to-1 vote for the bigger-than-expected cut.
The Fed's move came at the end of a long campaign by the central bank to tame prices in the US. Core US inflation, which excludes food and energy prices, rose 2.5 per cent in August, the lowest reading since February 2021. That is close to the Fed's target of 2 per cent inflation, but is much lower than a reading of more than 9 per cent in mid-2022.
The HKMA is expected to hold a media briefing about the interest rate move this morning before trading hours. A cycle of declining interest rates will be welcomed by struggling Hong Kong business operators and mortgage borrowers.
Geopolitical tensions, high interest rates and a strong local currency have caused many Hongkongers to head north to the mainland to shop and dine, causing some restaurants and stores in the city to shut their doors.
In the second quarter of this year, the city's gross domestic product (GDP) grew 3.3 per cent from a year earlier, following a revised year-on-year increase of 2.8 per cent in the first quarter.
Later today, HSBC, Standard Chartered, Bank of China (Hong Kong) and other lenders will disclose whether they plan to adjust their prime and deposit rates. Commercial banks in Hong Kong can decide when to change their rates; such decisions usually come some months after a US rate cut.
"There is a high likelihood that Hong Kong will only see a rate cut after another potential reduction by the US at the end of the year," said Eric Tso Tak-ming, chief vice-president of mortgage broker mReferral.
"However, the start of rate cuts in the US has a positive impact on the lending market," he said. "Currently, some second-hand properties have rental yields as low as 4 per cent. If future mortgage rates fall below rental yields, it will boost consumer confidence in entering the market."
Bank loans that are priced with the Hong Kong interbank offered rate (Hibor) have already been reduced by a percentage point over the past nine months.
Hong Kong's Central district from the sky. Photo: SCMP/Winson Wong alt=Hong Kong's Central district from the sky. Photo: SCMP/Winson Wong>
The one-month Hibor, which is used to price many mortgage loans, weakened to a one-year low of 3.7 per cent on Tuesday from 4.9853 per cent at the beginning of this year. The three-month Hibor, which is used more with corporate and personal loans, fell to 4 per cent from 5.0716 per cent over the same period, according to data published by the Hong Kong Association of Banks.
"The Hibor rate will be lower due to the US interest rate cut if the cycle will be favourable for a rate in the future," said Raymond Yeung, chief economist for Greater China at ANZ Banking Group. "The trend will be helpful to the Hong Kong economy and business environment."
The HKMA has followed the Fed's monetary policy since 1983 under its linked exchange-rate system, which preserves the local currency's peg to the US dollar. Before the rate cut on Thursday, the HKMA and the Fed have kept their key lending rate at the current level since July 2023, when they last raised rates by 25 basis points.
The last time the US cut rates, in March 2020, the Covid-19 virus was spreading across the globe and the emerging pandemic hit the global economy hard.
High inflation in the US in 2022 caused the Fed to raise rates 11 times from March 2022 to July 2023 - by 550 basis points to a 22-year high - and Hong Kong's base rate increased similarly.
The city's lenders, however, only raised their prime rates five times from September 2022 to July 2023 by a total of 87.5 basis points, to their highest levels since 2007.
The prime rate at BOCHK, HSBC and subsidiary Hang Seng Bank is set at 5.875 per cent. The rate at Standard Chartered, Bank of East Asia, Citigroup, CCB Asia and other lenders stands at 6.125 per cent.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.