HK cuts rates, but nervous banks stand still
Friday, 10 October 2008

REUTERS, HONG KONG- Hong Kong trimmed its main interest rate on Thursday, effectively taking the total reduction this week to 150 basis points, but failed to prod jittery banks into lowering borrowing costs for even their best clients.

Commercial lenders, including HSBC and its subsidiary Hang Seng Bank, kept prime rates unchanged because the rate cut did not lower borrowing costs on money markets, nearly frozen by US and European bank failures.
 
The Hong Kong Monetary Authority reduced the base rate charged through its overnight discount window by 50 basis points to 2 percent, mimicking Wednesday's US Federal Reserve cut in coordination with other major central banks to try to contain the financial crisis.
 
Thursday's move was expected because Hong Kong usually tracks Fed rate moves to maintain the relative value of it dollar-pegged currency.
 
It had been keeping the discount rate 150 basis points above the Fed's benchmark, but surprised markets on Wednesday by reducing that margin to 50 basis points, effectively the biggest one-time cut in the base rate since 1998.
 
Joseph Yam, the chief of Hong Kong's central bank, said on Thursday he hoped the rate cut would help bring down the cost of borrowing for all industries.
 
But HSBC, Hang Seng Bank and BOC Hong Kong said on Thursday they would keep their best lending rate, or prime rate, unchanged at 5.25 percent. Standard Chartered also kept its prime rate at its current level of 5.5 percent.
 
"There is an extreme risk aversion among banks right now," said Kelvin Lau, an economist with Standard Chartered. "Banks are very happy to go the safe route and park their funds in safe investments even at zero returns."
 
Analysts said lenders will resist trimming rates so long as interbank borrowing costs keep mounting, with risk aversion on the rise. The one-month HIBOR rate rose to 4.94/5.14 percent in late trade from 4.60/4.70 percent at Wednesday's close.
 
Not even the unprecedented coordinated rate cuts on Wednesday by the Fed and central banks in Europe, China and Canada could completely thaw money markets and prod banks into freely lending to each other again.
 
Overnight dollar borrowing costs were as high as 7 percent in Asia on Thursday and dropped to around 3.6 percent in London, still more than double the Fed's new target of 1.5 percent.
 
Hong Kong Financial Secretary John Tsang said the coordinated rate cuts could increase market liquidity but more importantly sent a stronger message to the world that different countries facing the financial turmoil would cooperate.
 
Hong Kong is grappling with the specter of recession.
 
"Things are not looking good but Hong Kong will likely skip a technical recession... The external environment feels like we are already in a recession. Hong Kong is seeing the symptoms of it." Lau of Standard Chartered.
 
A coordinated rate cut by global central banks, including the People's Bank of China, has bolstered sentiment in the stock market, sending the blue-chip Hang Seng Index up 3.31 percent after a three-day losing streak.

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