Federal Reserve

Rates to tumble another 50 points

PUBLISHED : Thursday, 17 May, 2001, 12:00am
UPDATED : Thursday, 17 May, 2001, 12:00am

Hong Kong interest rates are set to tumble another 50 basis points when the Hong Kong Association of Banks (HKAB) meets tomorrow - and further cuts may be on the cards next month.

Tomorrow's HKAB meeting could see prime lending rates falling to 7 per cent and mortgage rates to below 5 per cent - levels last seen in Hong Kong more than 30 years ago.

The latest cut to rates will follow in the wake of Tuesday's announcement by the United States Federal Reserve that it is cutting the Fed Funds rate by 50 basis points to 4 per cent.

The Fed move, aimed at preventing a recession which is looming over the US economy, is the fifth half-percentage point cut in US rates so far this year.

A warning issued by the Fed that further weakness lay ahead for the economy has led analysts to expect a sixth cut when the Fed meets again next month.

The Hong Kong Monetary Authority yesterday responded with a 50 basis point cut to its 'base rate' and the HKAB was expected to cut savings deposit rates by the same margin tomorrow to 2.5 per cent.

This step invariably leads to an automatic adjustment in prime lending rates, which are likely to fall from their present 7.5 per cent to 7 per cent at the same time.

The HKMA's base rate provides overnight liquidity to the banking system through the discount window. It is set at either 150 basis points above the prevailing US Fed Funds rate, or the average of the five-day moving averages on overnight and one-month Hong Kong interbank offered rates, whichever is higher.

With these local money market rates below 4 per cent, and in the wake of the US Fed Funds rate moving to 4 per cent, the HKMA cut its base rate to 5.5 per cent.

Analysts said the latest cut to rates was unlikely to have a big impact on bank earnings, loan growth, or the economy.

'Because of the liquidity in the banking system, banks are able to price down deposits as aggressively as they are pricing down prime lending rates or mortgage rates,' said Morgan Stanley analyst Amit Rajpal. 'So the impact is fairly muted and I don't see it spilling over into much higher lending demand because we are in a global slowdown.'

Credit Suisse First Boston analyst Mehdee Reza said the latest rate cut had been 'pretty much priced in' by the market.

Warren Blight, head of regional banking research for ING Barings, said while lower rates were 'well and good', the key ingredient to restoring growth in the Hong Kong economy was confidence.

'For the man in the street the good news was that local unemployment rates showed no deterioration and the key drivers in the property market were mostly present - affordability was high and rates had come down.'