Hong Kong keeps rate steady for seventh time as traders shift hope of cuts to later this year

Hong Kong's de facto central bank kept its base rate unchanged for the seventh time - with local lenders following suit - as traders in the financial markets shift their attention to later this year in expectation of the first cut in borrowing costs.

The city's base rate remains at 5.75 per cent, the Hong Kong Monetary Authority (HKMA) said early on Tuesday morning. Hours earlier, the US Federal Reserve said it would keep its target rate in the range of 5.25 per cent to 5.5 per cent in line with expectations, pencilling in one cut this year.

HSBC, Hong Kong's biggest note-issuing bank, and DBS Hong Kong announced at mid-day on Thursday that they will keep their key lending and deposit rates unchanged, which means mortgage borrowers and companies face a longer wait for relief from high borrowing costs.

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"The most recent inflation readings have been more favourable than earlier in the year, and there has been modest further progress toward our inflation objective," Fed Chairman Jerome Powell said after a two-day meeting. "We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2 per cent."

The Fed's policymakers signalled just one rate cut this year, pencilling in four reductions in 2025. That did little to douse the fervour in the stock market, as the S&P500 index surged past 5,400 points for the first time. The benchmark ended the day at 5,421.03, a gain of 0.85 per cent.

US Federal Reserve chairman Jerome Powell spoke after the central bank's two-day policy meeting in Washington, US, on May 1, 2024. Photo: Reuters alt=US Federal Reserve chairman Jerome Powell spoke after the central bank's two-day policy meeting in Washington, US, on May 1, 2024. Photo: Reuters>

The HKMA cautioned the public that high interest rates may persist for some time following the US Federal Reserve's most recent rate decision, while most traders still expect cuts to begin in September.

The HKMA has followed the Fed's monetary policy in lockstep since 1983 under its linked exchange rate system to preserve the local currency's peg to the US dollar.

The HKMA and the Fed have kept their key lending rates at the current level since last summer, when they last raised them by 25 basis points. They increased their rates 11 times between March 2022 and July 2023, taking them to the highest level since December 2007.

Core US inflation rose 3.6 per cent in April, slightly lower than the 3.8 per cent in March but still well above the Fed's target of 2 per cent.

"Central Bankers have said they are yet to observe the evidence needed to justify dropping rates, which has pushed initial forecasts of a cut in spring into summer, and now possibly into autumn," said Jacky Lam, a financial consultant at Charles Schwab Hong Kong, on Wednesday before the Fed's decision. "Higher-for-longer continues to cause pain in areas such as housing, where consumers can take some time to adjust to elevated rates and prices, but generally on the whole, markets are faring comfortably in the high-rate environment."

The Fed's decision was widely expected, as 99.4 per cent of traders predicted the US central bank would leave the interest rate unchanged after its policy meeting, according to data compiled by CME Group based on Fed fund futures contracts on Tuesday.

More than 90 per cent of the traders expect the Fed to keep the rate unchanged again in July, while just under half forecast a 25 basis-point cut in September.

The one-month Hibor, or Hong Kong interbank offered rate, weakened to 4.5098 per cent on Tuesday from 4.9853 per cent at the start of the year. Three-month Hibor fell to 4.7323 per cent from 5.0716 per cent over the same period, according to data published by the Hong Kong Association of Banks.

HSBC, Standard Chartered, Bank of China (Hong Kong) (BOCHK) and other lenders will announce later today whether they plan to adjust their prime rates and deposit rates. The city's lenders raised their prime rates five times from September 2022 to July 2023 by a total of 87.5 basis points to the highest level since 2007.

The prime rate at BOCHK, HSBC and its subsidiary Hang Seng Bank is set at 5.875 per cent. The rate at Standard Chartered, Bank of East Asia, Citigroup, CCB Asia and other lenders stands at 6.125 per cent.

Hong Kong's banks did not replicate every rate hike carried out by the US in the last cycle, so they have no urgent need to cut rates, according to Tommy Ong, managing director of T.O. & Associates Consultancy.

"The Fed Fund rate has to be cut for Hong Kong banks to engineer a prime rate cut that may only be half the magnitude of the Fed fund rate cut," he said.

"If the US cuts the rate by 25 basis points in September, Hong Kong banks may cut their prime rate by 12.5 basis points."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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