Regulator follows US line as banks warn rate reductions will put further pressure on earnings

The Hong Kong Monetary Authority (HKMA) has cut its base rate by 50 basis points to 6.5 per cent, and local banks are expected to follow with interest-rate reductions.

The de facto central bank's lowering of the base rate - the fee it charges banks on overnight loans - followed the United States Federal Reserve Board's third rate cut this year.

The Fed lowered the rate US banks charge each other for overnight loans by half a percentage point to 5 per cent, continuing its efforts to spur economic growth.

Bankers said more rate cuts in Hong Kong would further erode banks' profits and increase pressure to raise fees. However, 'monetary easing in the US should have a stimulating effect on economic activities which will benefit Hong Kong', an HKMA spokesman said.

Bankers said they expected the Hong Kong Association of Banks (HKAB) to cut the savings rate by 50 percentage points to 3.25 per cent when it meets tomorrow.

Under Hong Kong's cartel system, the HKAB meets each Friday to decide on a savings rate level. Individual banks are expected to cut the prime rate from 8.5 per cent to 8 per cent.

Andrew Fung, treasurer of Commonwealth Bank of Australia, said the US is set to cut interest rates by another 50 basis points in May, bringing the total interest rate cut to 2 per cent this year.