Hong Kong keeps base rate unchanged, as US Fed paves way for a cut ‘as soon as’ September

The Fed’s decision was widely expected, as 95.9 per cent of traders expected the US central bank to leave rates unchanged after its policy meeting, according to data compiled by CME Group, based on Fed fund futures contracts on Wednesday.

In contrast, all traders expect a rate cut after the FOMC’s next meeting on September 18, with 85.8 per cent expecting a cut of 25 basis points, 13.8 per cent betting on a 50-basis-point reduction and 0.4 per cent believing the Fed will go extreme with a 75-basis-point reduction.

Positive signals from the Fed drove a rally on Wall Street. The S&P 500 index climbed 1.6 per cent, while the Nasdaq 100 rose 2.8 per cent, led by an 11-per cent jump by Nvidia.

“Recent inflation data, including the latest personal consumption expenditure price index, have showed that broad disinflation is in place,” according to a report by UBS Global Wealth Management’s chief investment office, before the FOMC’s decision. “We expect a steady deceleration in domestic demand, ongoing disinflation, and a cooling labour market will allow the Fed to begin policy easing in September.”

The HKMA and the Fed have kept their key lending rate at the current level since July 2023, when they raised rates by 25 basis points. The US and Hong Kong increased their rates 11 times between March 2022 and July 2003, taking them to the highest level since December 2007.

Core US inflation, which includes all items except food and energy, rose 3.4 per cent in May, compared with 3.6 per cent in April. That is slightly lower than the 3.8 per cent increase in March but is still above the Fed’s target of 2 per cent.

The one-month Hibor, or Hong Kong interbank offered rate, weakened to 4.5163 per cent on Wednesday from 4.9853 per cent at the beginning of this year. The three-month Hibor fell to 4.5736 per cent from 5.0716 per cent over the same period, according to data published by the Hong Kong Association of Banks.

HSBC, Standard Chartered, Bank of China (Hong Kong) (BOCHK) and other lenders will announce today whether they plan to adjust their prime rates and deposit rates. They can decide when to change their deposit and lending rates, which usually comes some months after a US rate cut.

The city’s lenders raised their prime rates five times from September 2022 to July 2023 by a total of 87.5 basis points, hitting the highest level since 2007.

“There is no pressure for Hong Kong’s [commercial] banks to move in tandem with a US rate cut,” said Ryan Lam Chun-wang, Hong Kong head of research at Shanghai Commercial Bank. “The first time for Hong Kong lenders to cut their prime rate may be in mid 2025.”

The prime rate at BOCHK, HSBC and its subsidiary Hang Seng Bank is set at 5.875 per cent. The rate at Standard Chartered, Bank of East Asia, Citigroup, CCB Asia and other lenders stands at 6.125 per cent.