Hong Kong’s monetary authority kept its key interest rate unchanged in lockstep with the US Federal Reserve, taking a breather after last year’s three cuts, in the first monetary policy decision of 2025.
The Hong Kong Monetary Authority (HKMA) maintained its base rate at 4.75 per cent on Thursday, in line with market expectations. Hours earlier, the Fed left its target rate in the range of 4.25 to 4.5 per cent, following the first Federal Open Market Committee (FOMC) meeting of the year.
The HKMA last cut the city’s base rate by a quarter point to 4.75 per cent in December, the lowest level in two years.
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The Fed’s decision was widely expected, as 97 per cent of traders anticipated no change to the interest rate, according to data compiled by the CME Group, based on Fed fund futures contracts on Tuesday.
Federal Reserve chair Jerome Powell speaks in Washington on December 18, 2024. Photo: Reuters alt=Federal Reserve chair Jerome Powell speaks in Washington on December 18, 2024. Photo: Reuters>
“With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance”, Fed chairman Jerome Powell said after the FOMC meeting.
The Fed’s decision ignored the January 23 demand by President Donald Trump for the US central bank to lower interest rates.
“I will demand that interest rates drop immediately”, Trump said in a speech from the White House to the World Economic Forum in Davos, Switzerland. “And likewise, they should be dropping all over the world. Interest rates should follow us all over.”
The world’s most powerful central bank is mandated to make decisions about monetary policy independently, free from political compulsion.
“The complex mix of rising inflation risks and substantial US budget deficit lead the Fed to maintain a steady rate stance, resisting President Trump’s pressure for cuts,” said Stephen Innes, managing partner at SPI Asset Management, a foreign exchange and commodity advisory firm, ahead of the FOMC meeting.
Innes said he expects two rate cuts this year, with the first taking place in June. “While this scenario may bolster the US dollar, it’s not ideal for stocks”, he added.
A property sales agent in Mong Kok on 16 October 2024. Photo: Elson Li alt=A property sales agent in Mong Kok on 16 October 2024. Photo: Elson Li>
HKMA’s move to hit pause on rate cuts on Thursday does not bode well for businesses and homeowners who would like to see lower funding costs amid a weak economy.
The HKMA has followed the Fed’s monetary policy in lockstep since 1983 under its linked exchange rate system to preserve the local currency’s peg to the US dollar.
Before the current rate cut cycle began, the US and Hong Kong increased their rates 11 times between March 2022 and July 2023, taking it to the highest level since December 2007.
US inflation rate rose by 2.9 per cent in December, the third monthly increase and faster than the Fed’s target of 2 per cent. Still, this was much slower than the record pace of 9.1 per cent in June 2022, which forced the Fed to substantially raise interest rates to thwart inflationary pressure.
“The policy decision is in line with market expectations”, HKMA said. “However, the pace of future rate cuts remains uncertain as it is dependent on US inflation and labour market data developments, the effect of previous rate cuts, as well as the impact of fiscal, economic and trade policies adopted by the new administration on economic activity.”
Unlike the US economy, Hong Kong needs more pump priming. The one-month Hibor, or Hong Kong interbank offered rate, weakened to 3.8291 per cent on Tuesday from 4.5395 per cent a month ago. Three-month Hibor fell to 3.8135 per cent from 4.3530 per cent over the same period, according to data published by the Hong Kong Association of Banks.
The Lunar New Year Fair at Victoria Park in Causeway Bay on 27 January 2025. Photo: Sam Tsang alt=The Lunar New Year Fair at Victoria Park in Causeway Bay on 27 January 2025. Photo: Sam Tsang>
As Thursday is a holiday to mark the second day of the Year of the Snake, HSBC, Standard Chartered, Bank of China (Hong Kong) and others will announce their rate decisions on Monday, the first working day of the Lunar New Year.
These lenders have cut their prime rate thrice since September by a combined 62.5 basis points.
Hong Kong commercial banks can decide when to change their deposit and lending rates.
The prime rate at HSBC and its subsidiary Hang Seng Bank is set at 5.25 per cent. The rate at Standard Chartered, Bank of East Asia, Citigroup, CCB Asia and other banks stands at 5.5 per cent.
“It is likely commercial banks will not cut their prime rate this time as they have already cut it three times,” said Kenny Ng Lai-yin, a strategist at Everbright Securities International.
“The rate pause will not have a big impact on the stock market as the move was expected. For the Hong Kong property market, the worst is over but the recovery pace will remain slow this year given the overall economic situation and the struggles of the commercial property sector.”
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