Interest Rate Discussion | Standard Chartered: US Rate Cut Opportunities Still Exist; OCBC: Hong Kong Prime Rate Adjustment Room Limited

The U.S. Federal Reserve kept interest rates unchanged as expected after the meeting, with the dot plot maintaining expectations of one rate cut this year and one next year. Local economists predict that the Fed still has the chance to cut rates in the second half of the year, but Hong Kong may not fully follow U.S. rate movements, and there is limited room for adjustments to the Hong Kong dollar’s best lending rate (P).

Standard Chartered Hong Kong Wealth Solutions Investment Strategy Head Chen Zhengluo stated that due to disappointing U.S. employment data and the authorities’ forecast of a significant slowdown in inflation next year, the Fed still has the opportunity to cut rates in the second half. However, the uncertain Middle East situation puts the Fed in a passive and cautious stance. If oil prices remain high for a prolonged period, it could impact the Fed’s rate cut plans.

Jiang Jing, Economist at OCBC Bank Hong Kong, believes that the Fed’s statement and Chair Powell’s post-meeting remarks are overall neutral to hawkish. But given the significant external uncertainties and changing global conditions, the Fed remains in a passive observation stance.

Regarding Hong Kong dollar HIBOR, Chen Zhengluo mentioned that the 3-month Hong Kong dollar HIBOR has fallen from over 3% last year to around 2.3% recently. Influenced by the cooling expectations of U.S. rate cuts and the spread factors, the Hong Kong dollar exchange rate has recently weakened, approaching the weak-side convertibility guarantee at HKD 7.85 per USD. If this level is reached, the 3-month HIBOR could rise to around 2.5% to 3%.

Limited Room for HKP Adjustment

Jiang Jing pointed out that after the Middle East conflict erupted, U.S. Treasury yields adjusted accordingly. Due to rising inflation expectations, the rate cut expectations decreased, but the Hong Kong dollar HIBOR has not shown a clear trend to follow. Overall, the market lacks direction, and it is believed that Hong Kong interest rates will not deviate too far from U.S. rates. In the short term, attention should be paid to whether the Hong Kong dollar hits the weak-side convertibility guarantee, which could tighten liquidity and push HIBOR higher. The Hong Kong dollar’s best lending rate has returned to its long-term average level, with limited room for adjustment. Even if the U.S. cuts rates once or twice in the next two years, Hong Kong is unlikely to follow.

EAST Asia Bank Chief Economist Zhuo Liang predicts that if the Iran conflict does not last too long, there could be a rate cut in the third or fourth quarter of this year, with a reduction of 0.25%.

Additionally, Wang Zhaoqi, Head of Asset Management for OYANA East Asia, believes that the U.S. may cut rates by up to 0.25% this year, but Hong Kong may not fully follow U.S. rate changes, with the best lending rate expected to decrease by between 0.125% and 0.25%.