After the US Federal Reserve and Hong Kong Monetary Authority (HKMA) cut their key policy rate by a full percentage point in 2024, at least two more rates are possible next year, according to analysts.
Hong Kong banks, meanwhile, may further cut their lending rate to a historical low of 5 per cent, which would benefit the economy and property sector, they added.
The market expects the Fed to hit pause on rate cuts in the first half of 2025, followed by two or three reductions in the second half for a combined 50 to 75 basis points, according to 10 analysts polled by the Post.
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“The US next year will continue to cut rates, but the pace and frequency of rate cuts may be less than initially expected,” Eddie Yue Wai-man, the CEO of HKMA, said on December 19.
The HKMA cut its base rate to 4.75 per cent, the lowest since December 2022. Photo: Jonathan Wong alt=The HKMA cut its base rate to 4.75 per cent, the lowest since December 2022. Photo: Jonathan Wong>
Hong Kong’s de facto central bank cut its base rate to 4.75 per cent, the lowest since December 2022, after the Fed cut its rate by the same amount to a range of 4.25 to 4.50 per cent. Both institutions reduced their key rate by a full percentage point in 2024, while local commercial banks cut their prime rate, the lending rate offered to their best customers, by 62.5 basis points.
However, the Fed’s rate outlook was hawkish, suggesting only two cuts in 2025.
“The [Fed’s rate cut] decision will depend on the inflation and unemployment rates, as well as the overall economic environment,” said Eric Tso Tak-ming, chief vice-president of mortgage broker mReferral.
“If the inflation continues to be controlled, the Fed may cut interest rates at least three times, bringing the rate down to 3.75 per cent next year. Hong Kong lenders may follow and cut their prime rate.”
Bank of China (Hong Kong), HSBC and its subsidiary Hang Seng Bank have set their prime rate at 5.25 per cent, while it currently stands at 5.5 per cent at Bank of East Asia, Standard Chartered and ICBC Asia. The lowest prime rate in Hong Kong has fallen to is 5 per cent. It stood at this level from 2009 to 2018 and again from 2019 to November 2022.
“A continuing trend of interest rate cuts will lower the cost of funding and reduce mortgage repayments, which will benefit Hong Kong’s property market and overall economy,” said Raymond Yeung, chief economist for Greater China at ANZ Banking Group.
The HKMA has followed the Fed’s monetary policy since 1983 under its linked exchange-rate system, but it is up to the commercial banks to decide on the timing of their prime and deposit rates.
Yeung believes Hong Kong lenders will continue to cut prime rates as they compete for mortgage and other bank loans.
“We expect two 25 basis points rate cuts by the Fed and HKMA in 2025, while Hong Kong lenders would reduce their rate by 12.5 basis points next year,” said Ryan Lam Chun-wang, Hong Kong head of research at Shanghai Commercial Bank.
Even after the rate cuts, the effective mortgage rate in Hong Kong would still stand above 3 per cent, which is higher than the rental yield for residential property, he added.
“As such, there is still room for further home price depreciation,” Lam said.
Others are more bullish on the rate outlook next year.
Tommy Ong, managing director of T.O. & Associates Consultancy, expects the Fed to cut interest rates three times next year for a combined 75 basis points, while Hong Kong lenders may cut the prime rate twice for a total of 0.25 percentage points, bringing it to historic low of 5 per cent.
“Further prime rate cuts would drive some investment demand for rental properties,” Ong said. “But the increase in house prices will be limited because of the high level of inventory and slightly high absolute interest rate.”
Ong expects property prices to increase by about 8 per cent next year.
“For the investment market, a low-interest-rate environment implies increased liquidity, which is favourable for market performance and also alleviates depreciation pressure on currencies in the Asia-Pacific region,” said Kenny Ng Lai-yin, a strategist at Everbright Securities International.
Ng believes the US will cut rates twice next year for a total of 50 basis points.
The only dissenting voice on the rate cut in the Post’s straw poll is Philip Tso, the head of institutional business for Asia-Pacific at Allianz Global Investors. He believes the US will hit pause on rate cuts in the near term.
“We think the Fed is likely to apply more caution on moving policy towards neutral, with the likelihood that it skips the opportunity to cut in January as it assesses incoming data,” Tso said.
“Market pricing has shifted to reflect a less dovish Fed policy outlook ahead, with the Fed funds rate now expected to be just below 4 per cent by June 2025.”
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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