Hong Kong Monetary Authority Slashes Base Rate to 5%

The Hong Kong Monetary Authority (HKMA) has made a significant move by slashing its base rate to 5%, effective immediately. This decision aligns with the pre-set formula that ties the HKMA's base rate to the US federal funds rate or Hong Kong Interbank Offered Rates (HIBORs). The recent 25-basis point downward adjustment in the target range for the US federal funds rate triggered the base rate cut, as 50 basis points above the lower end of the prevailing target range for the US federal funds rate is now 5%.



This rate cut by the HKMA comes amidst a cooling Hong Kong economy, with GDP growth slowing to 2.7% YoY in Q1 2024 and annual inflation easing to 1.1% in April. The move is expected to have a cascading effect on local commercial banks' lending rates, with major banks such as Bank of China (Hong Kong), HSBC, Standard Chartered, and Bank of East Asia following suit and reducing their prime lending rates. This aims to lower funding costs for local businesses and mortgage borrowers, rebooting economic activity.



The rate cut is anticipated to have a positive impact on Hong Kong's property market and mortgage borrowers, as lower interest rates reduce borrowing costs and make mortgages more affordable. This could stimulate demand for property, potentially leading to an increase in property prices and a boost for the real estate sector. However, the pace of rate cuts may be slower than in the US, and there could be a time lag between the HKMA's base rate and commercial banks' lending rates.

The rate cut also sparked a stock rally and lending rate reductions, with sectors like Chinese mainland property developers, home appliances manufacturers, and big tech firms benefiting. However, the long-term prospects for Hong Kong markets remain uncertain, hinging on the narrative around policies of the world's second-largest economy and the fundamentals of Chinese mainland companies.

In conclusion, the HKMA's base rate cut to 5% is a significant move that aligns with the US Federal Reserve's rate cut and aims to support Hong Kong's economic growth. The impact of this rate cut on the property market, mortgage borrowers, and the broader economy will be crucial to monitor in the coming months.