HK Banks wary of matching Fed

The Standard: Lenders said they might not match Wednesday's quarter-point interest rate cut by the US Federal Reserve as Hong Kong's prime interest rate is already very low. "It is of very low chance that Hong Kong banks will follow the US Fed and lower the city's interest rate," said Margaret Leung Ko May-yee, HSBC general manager and global co-head for commercial banking. "Three-month HIBOR has been very steady in the past two months. If three-month HIBOR falls below 1 percent after the US rate cut, we may seriously consider if there is a need to lower the [prime] interest rate by that time," she added. Before the Fed's rate cut, three- month HIBOR was 2.079 percent. Given a growing consensus in financial markets that the Fed will keep its key interest rate steady following the latest cut, local banks are not likely to change their prime rates, according to Glenn Maguire, chief Asia economist at Societe Generale. "If they want to gain market share, they potentially could [cut interest rates], but I think banks are probably getting to the point where they can be more forward looking," said Maguire. "There has been a significant repricing of the [US] interest rate outlook in financial markets over the past two weeks. Some people are even speculating on the timing of a Fed rate hike in early 2009. Given this development, I think Hong Kong banks may look through this last rate cut from the Fed and leave rates unchanged in Hong Kong," he added. The Fed has cut interest rates seven times since September last year, by a total of 325 basis points, bringing the Fed funds rate down to 2 percent - its lowest level in four years. Hong Kong banks, in turn, have lowered their best lending rates by 225 basis points and now offer prime rates of 5.25 percent and 5.50 percent. "There is no room for another rate cut. Most banks in Hong Kong are offering virtually zero savings rates," ICBC (Asia) (0349) executive director Stanley Wong Yuen-fai said. "If banks continue to lower prime interest rates, even though they cannot shed savings rates further, this will hurt banks' profitability," said Wong. "Rising inflationary pressure is another hidden danger." "Interest rates in Hong Kong have nearly bottomed out. I believe there is no chance for Hong Kong to follow the move of the Fed," said Wing Hang Bank (0302) chairman and chief executive Patrick Fung Yuk-bun. Maguire said the Fed will pause its rate cut cycle before starting to raise interest rates in the middle of next year as the US subprime-led financial crisis is gradually easing.

MyTake: If the Fed interest rate cut is expected to pause after this cut and the USD is expected to bottomed out, then I would consider the HK Banks very lucky indeed. They were virtually "cornered" in a sense as there is no more room to reduce interest further without jeorpardising their profit margin. Further cuts may force HKMA to reconsider the pegging viability of the HKD/USD ( peg to USD at USD1 : HKD7.80- with a plus & minus 5 cents) as it has weakened further the HKD against other currencies especially Yuan while spoking inflation. With regards to Yuan, the HKD has depreciated substantially now as 1 Yuan: HKD1.114 . It was only on Jan. 11, 2007. where China's currency first surpassed the HKD's official peg rate to the U.S. dollar since the Chinese currency system was overhauled 13 years ago.The rate was USD1:8.30Yuan then. The HKMA needs to really watch the movement of HKD/USD against the Yuan as there is a likelyhood that Yuan may appreciate faster than the HKD due to mounting pressure from G7 countries and as such the issue of repegging, depegging or revaluation of HKD will reemerge again. I believe it is a disadvantage for HK to maintain the peg especially, the two countries (HK and US) economies are increasingly moving away from each other while HK's economy is much closer to China. Nevertheless, the stronger and appreciating HKD as a result of stronger USD is good news to counter inflation and to provide a good reason to go back into the HK stock markets or properties again.

* As we know by now, the Federal Reserve cuts interest rates by 25bp on Wednesday and hinted that they will pause when they meet again in June. In response to this shift, according to dailyfx, the market immediately priced in an 85 percent chance that interest rates will be left at 2 percent at the next two monetary policy meetings in June and August 2008. So far, the shift in policy is exactly what the doctor wanted, ie a much stronger USD and lower gold, agriculture, crude oil and other commodities prices. It also sparks a buying of stocks as evident in the Dow Jones (+1.5%) at 13,010, Nasdaq (+2.81%) at 2,481, S&P (+1.7%) at 1,409, HKEX (+1.9%) at 26,241 and Nikkei (2.05%) at 14,049. KLSE on the other hand buck the trend by droping 0.7% to close at 1,271 due to losses mainly in the plantation sectors. You know la, our Sime and IOI already account for 16% weightage of KLCI.