HKMA cautions market on interest-rate risks as Fed signals policy easing 'as soon as' September

Hong Kong's de facto central bank has cautioned the public to be vigilant of interest-rate risks as traders speculated the US Federal Reserve will start cutting its key policy rate from next month, saying the outcome or trajectory is far from certain.

"Based on the Fed's public communication, a rate cut might happen as soon as the meeting in September," the Hong Kong Monetary Authority said in a statement. "Yet, it remains uncertain whether the pace of easing will follow market expectation. The public should carefully assess and manage the relevant risks when making property purchase, mortgage or other borrowing decisions."

The caution came after the HKMA kept its base rate unchanged at 5.75 per cent early on Thursday. Hours earlier, the Fed maintained its target rate in the range of 5.25 per cent to 5.5 per cent after concluding its fourth rate-setting committee meeting this year.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

HSBC, the biggest commercial bank in the city, also decided to keep its prime rate at 5.875 per cent, it said in a statement. The UK lender will pay the same 0.875 per cent per annum for savings deposits above HK$5,000 (US$640) and zero interest on amounts below that. Other lenders will make their decisions later today.

People walk past HSBC's main building in Central, Hong Kong. Photo: Eugene Lee alt=People walk past HSBC's main building in Central, Hong Kong. Photo: Eugene Lee>

While the Fed made no move this time, chairman Jerome Powell signalled a shift in favour of policy easing as early as the Fed's open-market committee meeting on September 18, as widely expected by market participants.

"The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labour market," Powell said after the meeting. "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

Rate traders have fully priced in a cut of 25 basis points or more at the September meeting, according to odds compiled by CME Group, based on Fed funds futures contracts.

Core US inflation, which includes all items except food and energy, rose 3.4 per cent in May, compared with 3.6 per cent in April. That is slightly lower than the 3.8 per cent increase in March but is still above the Fed's target of 2 per cent.

Fed chair Jerome Powell signalled a possible rate cut in September, subject to job and inflation data. Photo: Getty Images via AFP alt=Fed chair Jerome Powell signalled a possible rate cut in September, subject to job and inflation data. Photo: Getty Images via AFP>

Positive signals from the Fed fanned a rally on Wall Street. The S&P 500 index climbed 1.6 per cent, while the Nasdaq 100 rose 2.8 per cent, led by an 11-per cent jump in Nvidia stock. In Hong Kong, the benchmark Hang Seng Index weakened 0.2 per cent at the local lunch trading break, spooked by data showing a contraction in Chinese manufacturing.

JPMorgan Asset Management expects the Fed to cut its target rate in September and December, followed by four 25-basis-point reductions in 2025, its global market strategist Raisah Rasid said in a report. There are plenty of reasons to be constructive on Asian markets, "amid positive factors such as ongoing corporate governance reforms and supply-chain adjustments".

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 rate at the current level since July 2023, when they raised rates by 25 basis points. The US and Hong Kong increased their rates 11 times between March 2022 and July 2023, taking them to the highest level since December 2007.

The one-month Hibor, or Hong Kong interbank offered rate, weakened to 4.5163 per cent on Wednesday from 4.9853 per cent at the beginning of this year. The three-month Hibor fell to 4.5736 per cent from 5.0716 per cent over the same period, according to data published by the Hong Kong Association of Banks.

Besides HSBC, other lenders such as Standard Chartered, Bank of China (Hong Kong) (BOCHK) and others will announce on Thursday whether they plan to adjust their prime rates and deposit rates. They can decide when to change their deposit and lending rates, which usually comes some months after a US rate cut.

The city's lenders raised their prime rates five times from September 2022 to July 2023 by a total of 87.5 basis points, hitting the highest level since 2007.

"There is no pressure for Hong Kong's [commercial] banks to move in tandem with a US rate cut," said Ryan Lam Chun-wang, Hong Kong head of research at Shanghai Commercial Bank. "The first time Hong Kong lenders cut their prime rate may be in mid 2025."

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.

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.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.