Thursday, October 9, 2008

Hong Kong authority follows Fed to cut base rate

The Hong Kong Monetary Authority on Thursday followed the United States Federal Reserve to cut the base rate by 50 basis points, with the actual rate cut amounting to 150 basis points due to a methodology change alongside.

The base rate was thereby adjusted downward to 2 percent, with immediate effect.

The Federal Reserve announced its decision to reduce U.S. federal funds target rate by 50 basis points overnight in a concerted global effort to boost the deeply troubled financial market.

The base rate in Hong Kong was previously set at either 150 basis points above the prevailing U.S. Federal Funds Target Rate or the average of the five-day moving averages of the overnight and one-month HIBORs, whichever is higher.

With the methodology adjustments effective from Thursday, one leg of the formula for determining the base rate will be changed by reducing the spread of 150 basis points above the prevailing FFTR to 50 basis points, while the other leg remains unchanged.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, has said the rate cut will help alleviate tight liquidity and help those who are on mortgages for real property, although the effect may not be immediate.

Hong Kong banks had been unwilling to lend amid the recent financial turmoil, leading to high interbank lending rates and pressure on banks to raise mortgage interest rates.


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