Hong Kong major banks follow Fed rate cut with smaller reduction

The city’s de facto central bank has cut the benchmark interest rate by 25 basis points for the first time in 9 months, with local stocks ending the day lower.

Aligning with the US central bank announcement of a 0.25% interest rate cut to 4% to 4.25% as expected, the Hong Kong Monetary Authority decreased its base rate by the same amount to 4.5% to track US movement, according to its official announcement.

HSBC and Hang Seng Bank announced a 12.5 basis point cut to their prime rate, bringing it to 5.125%, effective this Friday. Bank of China (Hong Kong) and Standard Chartered (Hong Kong) followed with the same 12.5 basis point reduction,  effective Sep. 22, resulting in new prime rates of 5.125% and 5.375% respectively.

Billy Mak, Associate Director of the Centre for Corporate Governance and Financial Policy at Hong Kong Baptist University, said that the market’s expectation of the Federal Reserve cutting interest rates had already been priced into current valuations.

“The rise of Hong Kong stocks this week was a direct response of the market to the possible interest rate cut in the United States,” said Mak.

Duan Yang, associate director of the Department of Finance, Hong Kong Baptist University, predicted more investment and a boost in the financial market.

“In terms of the stock market, lower costs of capital immediately improve stock valuation,” she said. “It will also lead to increased margin trading, increasing trading volume and liquidity in the stock market.”

Echoing Duan, Steven Tam, Associate Director of Fulbright Securities Limited, said that the interest rate cut is generally positive for the whole Hong Kong stock market. Among them, utility stocks, property stocks and dividend stocks benefit more.

The Hang Seng Index broke through the 27,000-point mark during the morning session and then declined, before slightly rebounding ahead of the market close.

Dong Ding, Assistant Professor of economics and finance at Hong Kong Baptist University, said some alarming uncertainties in the Hong Kong market, including labour market conditions, consumer confidence, and tariff impacts related to technological advancement, may contribute to weakened market confidence and the decline of the stock index in the afternoon. 

For ordinary investors, Tam said they should focus on the medium- and long-term effects of the interest rate cut. He noted that the interest rate cut will also benefit gold prices.

Regarding the gold market, Mak explained that gold price rises typically stem from either capital speculation or central banks increasing their gold holdings. Both of these scenarios are hard to predict.