Finance counsels

Hong Kong’s central bank lowered its base rate to a record-low 0.5 percent and asked lenders to follow suit to help prop up the city’s faltering economy.

The reduction from 1.5 percent by the Hong Kong Monetary Authority came after the U.S. Federal Reserve cut its benchmark interest rate to as low as zero. Hong Kong typically follows the Fed because the local currency is linked to the U.S. dollar.

The “HKMA hopes Hong Kong lenders can make use of the loose monetary policy to help support the economy,” Joseph Yam, HKMA’s chief executive, told reporters in Hong Kong today. The impact of U.S. rate cuts is diminishing as rates are close to zero, he said.

Lower borrowing costs are unlikely to stimulate spending and cushion Hong Kong’s economy, because banks scarred by writedowns and credit losses remain reluctant to lend, according to Fitch Ratings. HSBC Holdings Plc, the city’s biggest mortgage lender, raised its home loan costs by the most in a decade this month to maintain profitability.

“The interest rate, as a traditional monetary tool, has lost its effectiveness in providing general economic stimulus,” Sonny Hsu, a Hong Kong-based analyst at Fitch, said before the HKMA’s announcement. Banks are “wary of taking on more exposure to loans in this environment.”

Hong Kong has slipped into its first recession since the severe acute respiratory syndrome epidemic in 2003 because of weaker exports and domestic demand. The economy shrank a seasonally adjusted 0.5 percent in the third quarter from the previous three months, after contracting 1.4 percent in the second quarter.

Room to Cut

The rate Hong Kong banks say they charge each other for three-month loans fell 31 basis points, the most in four years, to 1 500 fast cash payday loan.19 percent today. The drop in costs to the lowest since February 2005 gives lenders leeway to follow the HKMA’s move.

Falling interbank rates means banks have room to cut borrowing costs further, Sandy Flockhart, chief executive officer of HSBC’s Asia-Pacific unit, said Dec. 9.

The three-month Hong Kong Interbank Offered Rate, fixed daily at 11. a.m. local time, doubled in the month following Lehman Brothers Holdings Inc.’s Sept. 15 bankruptcy, as banks worldwide refused to lend to each other.

Hong Kong’s central bank in October narrowed the gap between its base rate and the U.S. Federal Funds Target Rate to help boost liquidity in the financial system. The base rate is 50 basis points above the Fed’s rate, compared with 150 basis points previously. A basis point is 0.01 percentage point.

Yam has added cash to the market by buying U.S. dollars with Hong Kong dollars. The injections have also prevented the city’s currency from strengthening beyond its fixed exchange rate.

The Hong Kong dollar has been pegged to its U.S. counterpart since 1983, and is allowed to trade 5 cents on either side of HK$7.8.

The Fed yesterday cut its benchmark interest rate to a target range of zero to 0.25 percent and said it will buy debt as the next step in combating the longest recession in a quarter- century and reviving credit.

Source

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