Analysts divided on scale of rate cuts after latest Fed reduction
Hong Kong is tipped to follow Tuesday's move by the United States Federal Reserve and lower interest rates tomorrow, but bankers and analysts are divided on the scale of the cut.
They generally agree interest-rate cuts alone will be unable to ease the credit crunch Hong Kong is experiencing.
Paribas Asian Equity's head of Asian banks research Robin Hammond said the Hong Kong Association of Banks (HKAB) should run short of excuses not to cut interest rates this week because interbank rates had fallen substantially, as had deposit interest rates.
He said at 9.75 per cent, the SAR's prime lending rate was at a 2 percentage point premium to the US prime rate of 7.75 per cent, creating scope for a cut in Hong Kong rates.
However, Mr Hammond said a 25 basis-point cut would only be 'cosmetic' because it did not reflect the fact Hong Kong rates had risen a net 1.25 percentage points in the past 13 months.
In October last year, the prime rate was raised 75 basis points, followed by another 75 basis point rise in January and a 25 basis point cut last month.
Credit Suisse First Boston senior economist Tao Dong said although banks were facing increasing pressure to cut interest rates, they tended to be reluctant to make such a move.
He said banks usually argued they needed more time to recover their margins, which had dipped into negative territory when interbank rates fell to levels around the prime rate earlier this year.
Mr Hammond said he did not believe this was a valid point because on the basis of their portfolios, banks were enjoying positive interest margins, albeit not as wide as before.
Dao Heng Bank general manager Tam Ping-shing said a 25 basis point cut would be appropriate because this would leave the association with more flexibility to deal with different situations.
He said if regional markets stabilised further, the association could opt for another 25 basis point cut after a reduction this week, without having to first see a corresponding move in the US.
But if it chose to cut rates more aggressively this time by 50 basis points, it would be more difficult for the association to raise rates again in case the region's situation deteriorated.
Mr Tao, Mr Hammond and Commonwealth Bank of Australia treasurer Andrew Fung Hau-chung believe interest-rate cuts will be unable to ease the credit crunch.
Mr Tao said for the situation to improve, capital costs would have to come down. That would be achieved by lower interest rates.
He said banks were cautious in granting new credits.
Mr Hammond said Hong Kong might see time deposit rates decline further because banks were increasingly reluctant to offer high interest rates.
Liu Chong Hing Bank executive director Nam Lee-yick said blue-chip companies had high demand for new bank borrowings to roll over maturing debts and he believed this would gradually extend to smaller corporates.