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Sean Kennedy

BANKS are expected to cut interest rates by a quarter of a percentage point today in a move which can stimulate loan demand and restore confidence to the property and retail markets.

   The United States Federal Reserve's decision to cut the discount rate by 25 basis points prompted the Hong Kong Monetary Authority yesterday to lower the territory's equivalent discount window, the liquidity adjustment facility (LAF), by the same margin.

  The bid and offer rates of the LAF, a window of last resort for banks with tight liquidity, are now 4 and 6 per cent.

  Bankers expected a similar cut in the retail savings rate by the Hong Kong Association of Banks, which meets later today. That would trigger a reduction of the prime rate by commercial banks to 8.5 per cent, from 8.75 per cent, they said.

  Lower interest rates would fuel demand for loans.

  One brokerage house forecast a 14 per cent increase in loans for use in the territory this year, compared with a 13 per cent growth last year.

  'It is positive news for banks' mortgage lending and commercial lending,' said Samuel Tsien, chief executive of Bank of America (Asia).

  Although banks' profit margin may not be affected, banks will benefit from the improved sentiments.

  'Interbank rates have come down by 50 basis points since December 27. Today's rate cut only serves to recognise the lower cost we have been enjoying,' said Nam Lee-yick, executive director of Liu Chong Hing Bank.

  While bankers were basking in the improved market sentiment, monetary authority chief executive Joseph Yam Chi-kwong doubted the downward interest rate trend would be sustained.

  'What we don't want to see is being caught offguard by a reversal of the downward trend. That may happen in the second half,' he said.

   The money market, which prices movements in wholesale rates well before the actual event, shrugged off the authority's rate action.

  HSBC Markets' Andrew Fung said rates over one, two, three and six months were about 12.5 basis points lower yesterday.

  Only the overnight rate showed a bigger movement. It was down to 5.5 per cent in the afternoon, from about 5.75 per cent on Wednesday, he said.

  Oakreed Financial Services managing director Patrick Thomas said he expected the prime rate of 8.75 per cent to fall by at least 25 basis points.

   'They ought to cut it to at least 8 per cent, but I don't think they will,' he said. 'Maybe we'll be lucky, and they'll cut it by half a percentage point.'   Mitchell Lim, vice-president of Union Bank of Switzerland, said Hong Kong bond yields were marked down early in response to the cut, but had edged up later in the day.

  Overall, the short end was benefiting rather than longer-dated paper, in line with the trend in the US where investors were wondering how much more longer bonds could fall.

  'Now is the beginning of the end of the bond market rally [in the United States],' said Michael Roche, a director of HSBC Asset Management Hong Kong.

  Mr Lim said corporates and property companies might well consider taking advantage of lower rates.



Demand for loans forecast to pick up after reduction in prime to 8.5pc