Days after the US Federal Reserve made an emergency interest rate cut to bolster the country's economy, Hong Kong immediately followed suit and announced that it has reduced the base lending rate by half a percentage point. The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, typically follows the Federal Reserve's every financial move to maintain the local currency's peg to the US dollar.
Hong Kong and the rest of the world were caught off guard when the Federal Reserve announced that it had cut its key rate by 50 basis points earlier in the week. The unscheduled rate cut was the first of its kind since the global financial crisis in 2008. The US agency stated that it was forced to trim down the rate in response to the growing risks caused by the ongoing spread of the coronavirus in China and dozens of other countries around the world.
The HKMA slashed the same amount of points off Hong Kong's base lending rate, which it said will be effective immediately. The agency stated in a post that the rate cut should help reduce the cost of money and aid all lenders in coping with the slumping consumption and retail activity.
Lenders and businesses around the city have continued to struggle since last year following the months of civil unrest, which had sent the local economy into a technical recession. The situation in Hong Kong was further worsened by the viral epidemic, which has caused millions of dollars in losses for local businesses and retailers.
Last year, the HKMA was forced to cut the official lending rate three times. All in all, the central bank had cut a combined 75 basis points. The cut managed to undermine the previous rate increases, which totaled around 255 basis points over nine consecutive increases from 2015 to 2018.
HKMA chief executive, Eddie Yue Wai-man, mentioned in a post on the bank's website that like the US Federal Reserve, it has now been forced to proactively use its monetary policy to mitigate possible economic risks caused by the uncertainty revolving the novel coronavirus. He added that during these uncertain times, investors should manage their risks prudently as markets are still volatile.
The bank announced that it will be closely monitoring the market situation and that it will immediately counteract any sudden changes. Yue added that the bank will continue its efforts to maintain orderly operations within the city's foreign exchange and money markets. This will involve making all necessary policy changes to stabilize the local currency's peg to the US dollar.
