Hong Kong cuts rates after Fed move, but banks stand pat on funding
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[August 01, 2019] By
Noah Sin and Donny Kwok
HONG KONG (Reuters) - Hong Kong's central
bank lowered its benchmark interest rate on Thursday, its first cut
since late 2008, tracking a cut in U.S. rates, although tight cash
conditions in the city kept banks from reducing borrowing costs.
The Hong Kong Monetary Authority keeps its policy in lock-step with the
U.S. Federal Reserve as the city's currency <HKD=D3> is pegged to the
greenback in a range of 7.75-7.85 per dollar.
On Thursday, the HKMA cut the base rate it charges through its overnight
discount window <HKDR=> by 25 basis points to 2.5%. The Fed cut rates on
Wednesday for the first time since the global financial crisis,
reflecting central banks' bias towards easing policy amid slowing global
economic growth and the protracted Sino-U.S. trade war.
HKMA chief executive Norman Chan warned on Thursday that the Hong Kong
Interbank Offered Rate (HIBOR), which provides a benchmark for many
local currency loans, may not immediately track the Fed's move given
domestic liquidity pressures.
He said Hong Kong's rates may be influenced by domestic factors, such as
large initial public offers, in the stock market.
Alibaba <BABA.N> is teeing up a secondary listing up to $20 billion in
Hong Kong, which would be the biggest secondary listing globally in
seven years. Brewer Anheuser Busch InBev NV <ABI.BR> marketed but then
dropped a $9.8 billion IPO for its Asia business last month.
"So I expect HIBOR would continue to be influenced by local supply and
demand conditions and may not immediately follow the move in LIBOR," he
(GRAPHIC: Creeping up - HIBOR LIBOR prime: https://tmsnrt.rs/2MxpHaY)
In a sign liquidity pressures had elevated funding costs, HSBC <HSBA.L>
<0005.HK>, the city's largest bank, Bank of China (Hong Kong) and Hang
Seng Bank <0011.HK>, said they would not cut the benchmark often used
for mortgages in line with the HKMA's move, keeping their best lending
rate at 5.125%. Standard Chartered Bank <STAN.L> also left its rate
unchanged at 5.375%. Lenders have little room to trim rates given that
HIBOR - the rate at which they borrow - remains elevated, said Carie Li,
economist at OCBC Wing Hang Bank in Hong Kong.
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An attendant walks outside the entrance to Hong Kong Monetary
Authority in Hong Kong, China November 10, 2015. REUTERS/Bobby Yip
"If banks don't get a lot back from these loans their net interest
margin is compressed," said Li.
Hong Kong has one of the most expensive housing markets in the world and
most mortgages are priced over HIBOR, or below the best lending rate,
also known as the prime rate.
HIBOR eased marginally across the curve on Thursday while the Hong Kong
dollar was a touch firmer at 7.8254 per dollar.
In neighbouring Macau, where the local currency is pegged to Hong
Kong's, the base rate was lowered by 25 bps to 2.5%, the local monetary
authority announced on Thursday.
Chan said Hong Kong's financial market and currency have not been
affected by recent social unrest in the city. Hong Kong has been
embroiled in a political crisis in the past months over a controversial
"Financial markets, overall, have been operating normally and smoothly,"
However, retailers are taking a knock from the protests with June retail
sales down 6.7% from a year earlier, the biggest decline since February.
Slowing global demand and the U.S.-China trade war also weighed on
economic activity. Data on Wednesday showed Hong Kong's economy grew
less than expected in the second quarter, with some banks lowering their
2019 growth forecasts for the city.
These headwinds could drive up the unemployment rate, currently at 2.8%,
Paul Chan, Hong Kong's financial secretary, said in a blogpost on
(Additonal reporting by Clare Jim, Alison Lui and Hong Kong Newsroom;
Editing by Sam Holmes and Jacqueline Wong)
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