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Nick Westra

With local lenders responding to Fed cut, prime drops below inflation level of 3.8pc
Hong Kong has fallen into a negative interest-rate environment after lenders matched the rate cut by the United States Federal Reserve, and analysts said another reduction of 50 basis points would probably follow next week to further boost the housing market while deepening the city's inflationary pressure.
As an immediate response to the Fed's sudden 75-basis-point cut on Tuesday, HSBC, Hang Seng Bank and Bank of China (Hong Kong) yesterday announced a reduction in prime lending  rates - effective today - by the same margin to 6 per cent, the lowest since 2005.  Standard Chartered Bank (Hong Kong), Bank of East Asia, DBS Bank (Hong Kong) and other small and medium-sized lenders reduced theirs to 6.25 per cent.
The result is a negative interest-rate scenario, reminiscent of  the mortgage rate from 1991 to 1994.  At 4 percentage points below prime, the mortgage rate now stands at between 3.1 per cent and 3.25 per cent, below the inflation rate measured at 3.8 per cent last month.
Property agents said negative mortgage interest rates would help bring the market back to 1997's peak levels  faster, although the impact would not be immediate because of the forthcoming holiday break.
'It is the first time  mortgages have had negative interest rates [when borrowing costs are lower than inflation],' said Wong Leung-sing, an associate director of Centaline Property's  research department. However, 'transactions will not surge in the short term as the  Lunar New Year is the low season traditionally'.
Apart from the rate cut, most banks also  would lower their savings rate by the same degree, leaving almost zero interest for deposits of less than HK$10,000.
Deposits of at least HK$10,000 now fetch an annualised yield of only 0.5 per cent to 1 per cent. For deposits of less than HK$10,000, some banks pay interest of only 0.15 per cent or even no interest.
Citing prevailing market sentiment, George Leung Siu-kay, HSBC's adviser on strategy and economics for Asia-Pacific, believes the Fed may cut its key rate by a further 50 basis points at next week's Federal Open Market Committee meeting, reducing it to 3 per cent and possibly lower later  in the year.
Whether Hong Kong will mirror  such a move will depend on the market. 'If Hong Kong interbank rates fall less than the US interest rates, it may not  be necessary for Hong Kong banks to cut rates by the same degree,' Mr Leung  said.
However, Citi  said in  a report that 'banks in Hong Kong [will] follow the Fed's next rate cut, which we expect to be 50 basis points'.
Ethan Harris, the chief US economist at Lehman Brothers,  projected that the Fed funds rate might come down to 2.5 per cent  this summer.
'Now the Fed is becoming more proactive,' Mr Harris said. 'They are basically sending the message out that we are going to be aggressive here. We do not want to risk a recession in the United States, and so more rates cuts are coming.'
While acknowledging that the  rate cut  of 75 basis points 'will help ease panic in global financial markets', Joseph Yam Chi-kwong, chief executive of the Hong Kong Monetary Authority, said 'it takes time to see' to what extent the move could resolve the subprime crisis.
'At present, the credit crunch is caused by the shortage of capital in financial institutions' and not steep pricing, Mr Yam said.  While a rate cut - or a reduction in the cost of capital - could help, 'the degree of helpfulness' remained to be seen.
Benjamin Hung Pi-cheng, the local chief executive of Standard Chartered, said that while the low interest rates  could induce inflation, Hong Kong's economy  was in better shape than in 2003 and 2004, when deposit rates were close to zero.
Mr Leung said: 'A low interest-rate environment will support domestic consumption, which could offset some of the impact if the US goes into recession.'
He predicted that negative interest rates  might last only one year if the US economy receded.



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