SCMP Saturday, January 6, 2001

Rate cut to boost spending


Sagging property prices could be in for a boost from the cut announced yesterday in bank interest rates.
And with borrowing costs set to tumble as more rate reductions are made in the months ahead, householders can expect to save thousands of dollars a month on mortgage repayments. This in turn should boost consumer spending and support economic growth, say analysts.
The SAR follows US rate cuts because the currency is pegged to the greenback. Unemployment figures from Washington last night added to signs of a slowing economy, but blunted fears of a full-blown recession. The jobless rate was steady at four per cent, although more than half of jobs growth was accounted for by the government sector. The manufacturing sector continued to bleed jobs.
Incoming Hong Kong Association of Banks chairman Peter Wong Tung-shing said yesterday the cap on deposit rates paid to Hong Kong bank customers would be cut by half a percentage point from 4.75 per cent to 4.25 per cent from Monday.
Mr Wong, chief executive and general manager of Standard Chartered Bank, said: "[Standard Chartered] will reduce the prime rate from 9.5 per cent to nine per cent effective next Monday."
Banks are free to set their own rates but changes in prime lending rates traditionally mirror changes announced to the regulated deposit rate, which usually changes in line with US interest rates.
Other banks are expected to follow suit with similar cuts in their prime rates.
Mortgage loans are priced off the prime lending rate, and in the present battle between banks for home-lending business, interest rates charged on home loans have been slashed to 2.5 per cent below prime rates. Therefore, any cut in prime rates will translate into an equal cut in mortgage rates.
The latest cycle of falling rates - expected to continue into the year - was triggered on Wednesday when the US Federal Reserve surprised the world's financial markets by announcing a 0.5 percentage point cut in its key Fed funds rate, or the rate it charges to make overnight loans to US commercial banks.
It had done so, said Mr Wong yesterday, in the wake of slowing economic data and warnings from US companies that their earnings were in retreat.
While slower US economic growth would have a negative impact on the Hong Kong economy, he added, the cut in interest rates would have a positive impact. Hong Kong would also benefit from strong growth in China's economy. "We expect another cut in US rates bringing the total cut to around one per cent - and there is a very high chance that Hong Kong rates will match that, barring unforeseen circumstances," he said.
Analysts were unanimous that the reduction would boost spending in the economy and come to the rescue of the stagnating property market. But there were wide differences on the extent of the boost.
A half a percentage point cut in mortgage rates on a home loan of $1 million over 20 years will save a homeowner $416.67 a month in loan costs - or $77,772 over the life of the loan.
Most analysts expect US rates to fall by a total of 1-1.25 per cent, and world share prices surged as a result of investor expectations that company earnings will be helped by lower funding costs and the boost a rate cut would give to consumer spending.
The Hang Seng Index was up 212.58 points, or 1.4 per cent yesterday, closing at 15,447.6.