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HK cuts interest rate to aid bank lending

By Liu Lillian (China Daily)
Updated: 2008-10-09 09:20

The Hong Kong Monetary Authority (HKMA) announced it will cut its benchmark interest rate with effect from today in a bid to encourage bank lending, as the city's economy heads for downturn amid the global credit crunch.

The base rate for banks will drop to 2.5 percent from 3.5 percent, based on the US benchmark target rate plus 50 basis points, down from 150 basis points, HKMA's Chief Executive Joseph Yam said yesterday.

"Hong Kong's banking system is very stable but we are facing challenges," Yam told reporters.

The move, which is the single biggest reduction since 1998, is in response to central banks around the world looking to increase liquidity, to try putting the brakes on the growing credit turmoil that is hammering financial markets.

But economists warned that lenders will remain cautious and prudent with financial markets still volatile.

"The interest rate cut is made with good intention but it would render little help to the market," said Law Ka-chung, a Hong Kong-based chief economist and strategist at the Bank of Communications.

The cut does not mean lower rates for banks' customers, since inter-bank lending rates remain high, said Dick Lee, an analyst at Phillip Securities.

"This may not have an immediate impact on the market, but we hope the new formula could help stabilize the inter-bank rates in the long run and lower the pressure on banks to lift lending rates," Yam said.

Traders said the effective reduction in the base rate could be smaller as it will be calculated on the average of the HIBOR (Hong Kong inter-bank offered) rates, which have been rising.

"This is seen as being able to soothe the liquidity pressures for banks, but HIBORs could take time to fall as banks should remain prudent in their lending amid volatile market conditions," Standard Chartered Global Research said in a report yesterday.

Standard Chartered Plc is keeping its key lending rate unchanged and "monitoring the market situation", a spokesman for the bank said yesterday.

Hong Kong, a major global financial center and the main investment gateway into the mainland, follows US rate moves because its currency is pegged to the US dollar. But tight credit markets are putting upward pressure on rates globally.

HKMA has said the city's money market was orderly despite rising concerns about credit risk, but it was ready to provide more liquidity if necessary.

The rate cut follows a series of measures by the HKMA to ease liquidity pressure, including the acceptance of US dollar assets as collateral in the inter-bank market. The city's monetary authority said it would provide more liquidity to local lenders after credit market turmoil triggered a bank run on the Bank of East Asia, the city's third largest bank, last month.

Hong Kong's benchmark Hang Seng Index tumbled below 16,000 for the first time in two years yesterday, on concern that the credit crisis will topple more banks and slowing growth will cut demand for Asia's exports.

The city's economy grew 4.2 percent in the second quarter from a year earlier, the slowest pace in almost five years, as exports and domestic consumption cooled.

"The measure is good but it tells the market how serious conditions are," said Irene Fan, a senior economist at Hang Seng Bank.

"Companies may benefit from paying lower interest, but what about corporates that can't get new loans?"