Hong Kong eases monetary policy as economy slips into recession, prompting city’s banks to cut rates for the first time in 11 years

The city’s base lending rate will be reduced by 25 basis points to 2 per cent effective immediately, the Hong Kong Monetary Authority (HKMA) announced on its website, matching the overnight cut of the same amount by the US Fed. That prompted HSBC, Standard Charted Bank and Bank of China (Hong Kong) - the city’s three note-issuing banks, to cut their rates for the first time in 11 years to take the pressure off small businesses.

Hong Kong’s economy shrank 3.2 per cent in the third quarter from the same period last year, its worst quarterly contraction in a decade, putting the city in a technical recession, according to a government statement Thursday.

“As the largest commercial bank in Hong Kong, HSBC has the social responsibility to help Hong Kong companies to cope with the difficult time,” said the bank’s Asia-Pacific adviser George Leung, during a press conference. “The cut may be small, but it could still be able to lift the burden of the companies and stimulate private consumption.”

Hong Kong’s monetary policy has mirrored the US ever since the city’s currency was pegged to the US dollar in 1983 under the currency board system. The joining at the hips of Hong Kong’s interest rates with America’s cost of funds has led to unintended consequences for the city’s economy, curtailing the HKMA’s ability to use monetary policy as a tool to curb inflation, or asset prices.