Hong Kong follows the US to keep interest rate unchanged

Hong Kong’s de facto central bank left its base rate unchanged after a similar move overnight by the US Federal Reserve, leaving borrowers in the city with a longer wait for funding costs to fall. The Hong Kong Monetary Authority (HKMA) announced its decision on Thursday morning to keep the city’s base rate at 4 per cent. Hours earlier, the Fed also kept its target rate in the range of 3.5 per cent to 3.75 per cent, after the first meeting of the Federal Open Market Committee (FOMC) this year. The pause came after the Fed and the HKMA cut their key interest rates by a total of 75 basis points over the last three FOMC meetings since September. “I think, and many of my colleagues think, it is hard to look at the incoming data and say that policy is significantly restrictive at this time,” Fed chairman Jerome Powell said in a media briefing after the FOMC meeting, indicating that there was no need to rush to cut rates. The Fed’s decision was widely expected. More than 97 per cent of traders expected no change, according to the CME’s FedWatch data based on the Fed funds futures contracts on Wednesday. “Available indicators suggest that economic activity has been expanding at a solid pace,” an FOMC statement said. “Job gains have remained low and the unemployment rate has shown some signs of stabilisation. Inflation remains somewhat elevated.” The Fed’s decision, however, was not unanimous – 10 members of the FOMC voted for no change, while two – Stephen Miran and Christopher Waller – preferred a quarter-point cut, according to the FOMC statement. Waller is seen as one of the potential candidates to replace Powell after the latter steps down in May. “Following the hawkish rate cut in December and a cumulative easing by 75 basis points over the last three meetings, the FOMC is expected to adopt a wait-and-see stance,” said Michael Krautzberger, the chief investment officer for public markets at Allianz Global Investors, on Tuesday. “Recent macro data, including stronger-than-expected third quarter gross domestic product growth and a decline in the unemployment rate in December, point to an ongoing robust economic environment.” The rate decision came as Powell’s term as Fed chair ends in May. Many analysts expect the new chair could be more receptive to pressure from US President Donald Trump, who has been highly critical of Powell for cutting rates too slowly. The US unemployment rate dipped to 4.4 per cent in December from 4.5 per cent in November. The inflation rate was steady at 2.7 per cent in December, unchanged from November, but higher than the Fed’s target of about 2 per cent. Under a currency peg known as the Linked Exchange Rate System, Hong Kong’s monetary policy has moved in lockstep with the Fed since 1983. However, commercial banks can decide when and by how much to cut their prime and savings rates. Analysts widely believe local lenders will not cut their prime rates any further, as the rates were cut to a historic low in October. With the savings rate close to zero, any reduction in the prime rate would affect the banks’ net interest margin and, as a result, affect their profitability. The prime rate at HSBC, its wholly owned subsidiary Hang Seng Bank and Bank of China (Hong Kong) is set at 5 per cent, while Standard Chartered and others have set theirs at 5.25 per cent. Their savings rate is set at 0.001 per cent, but only customers with deposits above HK$5,000 earn interest; those below that threshold earn none. HKMA’s deputy chief executive Arthur Yuen Kwok-hang last week said that although there was no room for prime rates to go any lower, a Fed rate cut would bring the Hong Kong interbank rate (Hibor) down, which would benefit most mortgage and corporate borrowers in the city. The first US rate cut this year was likely to be in June, as the unemployment rate and inflation rate move in different directions, said Tommy Ong, the managing director of T.O. & Associates Consultancy.