The Hong Kong Monetary Authority followed the US Federal Reserve and cut interest rates by 75 basis points today. To a certain extent, it has no choice in the matter if it wishes to maintain the Hong Kong dollar's peg to the United States dollar at current levels.
At least some of the leading commercial banks have followed by cutting their prime lending rates by 50 basis points. Assuming that my lending banks do the same and that the rate cut gets reflected in the HIBOR rates, this is obviously good news for me as it reduces our mortgage payments and improves cash flows. I expect most of my mortgage fixings to end up at around the 2.5% level.
With inflation in Hong Kong expected to rise even further as a result of the US$/HK$ weakness, the case for continuing to hold real estate in Hong Kong and not repaying debt early just got stronger.
For savers, deposit rates also dropped but by a lesser amount for the simple reason that they cannot go below zero which is what will now be paid on small deposits and call deposits. Larger deposits and term deposits will still earn some small amount of interest.
Question: if the Federal Reserve cuts again, could we see Hong Kong lending rates reach the point where it pays to borrow Hong Kong dollars to invest in other currencies? Put differently, could the Hong Kong dollar become the new lending currency for the carry trade?