Hong Kong banking sector: The Federal Reserve is expected to cut interest rates by 0.25% this week, and Hong Kong banks may reduce their interest rates by 0.125%

According to the Zhitong Finance APP, the Federal Reserve will announce its interest rate decision on Thursday (September 18) at midnight. Bankers in Hong Kong expect the Federal Reserve to announce a rate cut of 0.25%, while Hong Kong banks are likely to announce a reduction of the Hong Kong dollar prime rate by 0.125% this week. Currently, the mainstream Hong Kong dollar prime rates are "Big P" and "Small P," with the "Big P" used by several banks including Standard Chartered at 5.5%, and the "Small P" used by HSBC, Hang Seng Bank, and Bank of China at 5.25%.

Lin Junhong, head of the research department at Shanghai Commercial Bank, stated that the Federal Reserve will not cut rates by 0.5% this time, as the local hiring rate in the U.S. remains at a healthy level, with a layoff rate of about 1%. Although the vacancy rate has decreased, it has only returned to pre-pandemic levels. These indicators are not sufficient to support an urgent rate cut of 0.5%, so he believes the Federal Reserve will only cut rates by 0.25%.

The current prime rate for Hong Kong banks is only 0.25% higher than the level before the interest rate hike cycle began in 2022. Lin Junhong believes that the market expects the U.S. to cut rates three times this year. If the reduction is spread over two cuts, each by 0.125%, it would be a more flexible strategy for banks. Otherwise, if the prime rate fully follows the U.S. rate cut of 0.25%, and if the U.S. cuts rates again next month or in December, there may be no room for further reductions in the Hong Kong dollar prime rate, which could narrow the interest rate differential between Hong Kong and the U.S., leading to potential fluctuations in the Hong Kong dollar exchange rate.

Eddie Cheung, chief economist at Bank of East Asia, stated that the Federal Reserve is more likely to cut rates by 0.25%, as it remains concerned about the impact of tariffs on goods imported to the U.S. on inflation. During the previous rate hike cycle, Hong Kong banks did not fully follow the Federal Reserve's rate hikes, and he believes that if Hong Kong banks cut the prime rate this time, it may only be by 0.125%, not necessarily following the U.S. rate cut.

Jiang Jing, an economist at OCBC Wing Hang Bank, stated that the impact of tariffs on U.S. inflation is expected to emerge in future economic data, and a stagflationary economic environment will constrain the pace of U.S. rate cuts. Therefore, she believes the Federal Reserve will restart rate cuts this week at a rate of 0.25%. However, she anticipates that Hong Kong banks may announce a 0.25% reduction in the prime rate this week, following the U.S. rate cut. If this reduction does not follow, there may be another reduction of the remaining 0.125% at the next interest rate meeting at the end of next month.

A recent report from Standard Chartered suggests that the labor market data in the U.S. for August has "opened the door" for a 0.5% rate cut by the Federal Reserve this week. Zeng Jizhi, head of financial markets and strategic clients for Hong Kong, Greater China, and North Asia at Standard Chartered Bank, stated that the disappointing non-farm payroll data and unemployment rate will affect domestic consumption in the U.S., and inflationary pressures are easing. Therefore, he expects the Federal Reserve to cut rates by 0.5% this week. He refrained from commenting on whether Hong Kong banks will cut the prime rate this time, only expecting that after the U.S. restarts its rate cut cycle, the Hong Kong dollar interbank offered rate will fall to 2.5% by the end of this year