Hong Kong central bank follows Fed cut, hopes for calm amid protests

Asia Business
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HONG KONG: The Hong Kong Monetary Authority (HKMA) cut interest rates for the second time this year on Thursday (Aug 19) and sought to lower borrowing costs for small businesses, as the economy took a knock from months of anti-government protests and fallout from US-China trade tensions.

HKMA lowered its base rate charged through the overnight discount window by 25 basis points to 2.25 per cent, hours after the US Federal Reserve delivered a rate cut of the same margin.

Hong Kong’s monetary policy moves in lock-step with the United States’ as the city’s currency is pegged to the greenback. The Fed cut rates by 25 basis points on Wednesday “to provide insurance against ongoing risks” such as weak global growth and the Sino-US trade war.

Last month, the HKMA followed the Fed to cut rates for the first time since the 2008/09 global financial crisis.

Thursday’s cut comes after more than three months of anti-government protests in the city, with violence and police response escalating over the summer. That has added to pressure from the trade tensions on the Hong Kong economy.

HKMA’s chief expressed hopes for the city to return to calm after 100 days of anti-government protests.

“I hope we can restore order as soon as possible, to allow commercial, economic and financial activities to carry on as normal,” HKMA chief executive Norman Chan told reporters on Thursday. “This can help Hong Kong better deal with the overall difficult circumstances.”

Chan said HKMA is working with the banking industry to alleviate pressure on financing costs of small- and medium-sized enterprises. Hong Kong’s economy is expected to slip into recession in the third quarter.

The city’s banks such as HSBC will now decide whether to follow suit and trim commercial interest rates, which would affect mortgages in the real estate-reliant city. Chan said the local lenders may not follow his lead.

“In the longer run, Hong Kong interest rates should track US dollar interest rates,” he told reporters on Thursday. “But short-term interest rate movements are affected by supply and demand in Hong Kong dollar funding.”

Such dynamics are often driven by large initial public offerings in Hong Kong like the US$6.6 billion listing of Brewer Anheuser-Busch InBev NV’s Asia business this week.

The Hong Kong dollar was last seen at 7.8243 per dollar, 0.08 per cent firmer on the day. It is pegged to the US dollar at 7.75-7.85 per dollar.

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