Analysts say the relief for homeowners from the small cut will be temporary
Several leading banks yesterday cut their lending rates by 12.5 basis points, presenting homeowners with a small reduction in their monthly mortgage repayments.
However, the relief that will follow a cut in the prime rate from 5.125 per cent to 5 per cent will be modest and temporary, according to analysts.
'Banks can afford to reduce prime because the spreads on their prime-based assets are unusually high now,' said John Wadle, the head of regional banking at UBS. 'But this can't last. As US rates rise further and liquidity in the local market inevitably tightens up, local rates will follow suit.'
Changes announced to both lending and deposit rates followed the decision on Wednesday by the US Federal Reserve that it would raise its key federal funds rate by 25 basis points, to 2 per cent from 1.75 per cent. The Fed also said further increases aimed at pre-empting inflation would continue at a 'measured pace'.
Typically, Hong Kong interest rates closely track US rates through the linked exchange-rate system. However, a flood of liquidity into the local money market has driven domestic rates well below US rates. And with loan demand still weak, local banks were not expected to follow the latest rise by the Fed.
But announcements from HSBC, Hang Seng Bank, Standard Chartered and DBS Bank that they would cut their prime rates to 5 per cent came as a surprise. The first three lenders also lowered their savings deposit rates by 0.125 percentage point to 0.001 per cent, while DBS trimmed its standard savings rate from 0.15 per cent to 0.03 per cent.