US Rate Cut May Stablise Markets, Says Yam

by Mary Swire, Tax-News.com, Hong Kong

23 January 2008

Hong Kong Monetary Authority Chief Executive, Joseph Yam on Wednesday suggested that the substantial cut in the US interest rate this week may calm the temporary panic in Hong Kong's financial market.

He urged investors to look rationally into market developments.

The US Federal Reserve reduced its benchmark interest rate by three quarters of a percent to 3.5% earlier this week, in order to boost confidence in the economy.

Following the surprise cut, the Hong Kong Monetary Authority on Wednesday announced it had lowered Hong Kong's base rate by three quarters of a percent - or 75 basis points - to 5%, according to a pre-set formula.

Speaking to the media following the move, Mr Yam explained that the US rate cut had an initial stabilizing effect on the global financial panic and the property market in the States, but suggested that it would take time to see whether the move had helped to ease the US credit crisis and reverse the housing contraction.

As the current US crisis is caused by banks' capital shortages due to the subprime mortgage problem, Mr Yam expressed the belief that the short-term motivation in the real-estate market might not be sensitive to the interest-rate trend.

He added that it will be up to local banks to decide whether to follow the rate decrease and cut their own interest rates.

Hong Kong's base rate is set at either 150 basis points above the prevailing US federal fund's target rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates, or HIBORs, whichever is the higher.

Recommended