HONG KONG – Major banks in Hong Kong have trimmed their Hong Kong dollar deposit and lending rates on Thursday after the Hong Kong Monetary Authority slashed the base rate by 25 basis points to 4.75 percent.

This came after the US Federal Reserve cut the target range for the US federal funds rate to 4.25 percent to 4.5 percent by 25 basis points. After the announcement of the interest rates cut, Fed Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation.

The Hongkong and Shanghai Banking Corporation announced on Thursday that it will cut its Hong Kong dollar best lending rate by 12.5 basis points to 5.25 percent per annum effective on Friday. The HSBC Hong Kong dollar savings deposits rate will also be cut by 12.5 basis points to 0.25 percent per annum.

Effective on Dec 23, Bank of China (Hong Kong)’s Hong Kong dollar prime rate and Hong Kong dollar savings deposit rate will both be reduced by 12.5 basis points to 5.25 percent and 0.25 percent per annum respectively.

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Other banks such as Standard Chartered Bank (Hong Kong), Hang Seng Bank, ICBC (Asia) and Bank of East Asia all followed suit in cutting their Hong Kong dollar deposit and lending rates.

The further lowering of the US federal funds rate is in line with market expectations.  Since September this year, the US Fed has cut interest rates by a cumulative 100 basis points, and the “dot plot” released after this meeting indicated there may be a slower pace of rate cuts in 2025 than previously expected.  

“When you include the forward guidance components, it was a hawkish cut. With stronger expected growth married with higher anticipated inflation, the US Fed reduced the number of expected rate cuts in 2025. The longer the pause phase (of interest rate cut) persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025,” argued Jack McIntyre, portfolio manager at fund manager Brandywine Global.

HKMA Chief Executive Eddie Yue Wai-man emphasized that the US Fed is still in an interest rate reduction cycle, though the pace and magnitude of future interest rate cuts are subject to considerable uncertainty.

“This reflects that the pace of future rate cuts remains uncertain as it is dependent on US inflation and labor market data developments, and economic activity may also be influenced by fiscal, economic and trade policies,” he said.

 The HKMA. chief executive reiterated that Hong Kong’s financial and money markets operate very smoothly and an orderly fashion, with stable market liquidity, and a steady Hong Kong dollar exchange rate.

“With regard to deposit and lending rates, banks will normally take into account factors such as funding supply and demand in the interbank market, the level of interbank rates and their own funding cost structures,” he argued.

The interest rate reduction environment will be helpful to Hong Kong’s economy and property market, and the burden on borrowers will also be reduced, he said.

“We believe the city’s property market is gradually stabilizing under the environment of gradual interest rate cuts. In the past one or two months, the transaction volume of the property market has been stable and upward, and the price level has also increased slightly.”

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But the HKMA chief executive stressed that borrowers and homebuyers should carefully manage interest rate risks when buying properties, taking out mortgage loans or engaging in similar activities, as there is great uncertainty about the pace of future interest rate cuts.

If the pace of US interest rate cut really slows down next year, this will exert significant impacts on the performance of various asset classes.

“After the US stock market has soared by 20 percent this year, its valuation is no longer cheap, and the volatility is expected to be higher in the future. Asian stock markets are undervalued and face relatively little adjustment pressure, and this asset class continues to benefit from the Chinese mainland’s economic stimulus policies and the close trade performance in the region in the future,” said Belle Liang, chief investment officer at Hang Seng Bank’s Investments and Wealth Solutions.

“When the stock market fluctuates sharply, future bond investments will focus on US dollar bonds with a duration of three to six years and the European bond market,” Liang added.