After the US Federal Reserve and the Hong Kong Monetary Authority (HKMA) cut their key policy rate by a full percentage point in 2024, at least two more rates are possible next year, according to analysts.
Hong Kong banks, meanwhile, could further cut interest rates to an all-time low of 5 percent, which would benefit the economy and the property sector, she added.
The market expects the Fed to pause rate cuts in the first half of 2025, followed by two or three cuts in the second half for a total of 50 to 75 basis points, according to 10 analysts surveyed by the Post.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyzes and infographics, brought to you by our award-winning team.
“The US will continue to cut interest rates next year, but the pace and frequency of rate cuts may be less than initially expected,” HKMA CEO Eddie Yue Wai-man said on December 19.
The HKMA cut its base rate to 4.75 percent, the lowest since December 2022. Photo: Jonathan Wong alt=The HKMA cut its base rate to 4.75 percent, the lowest since December 2022. Photo: Jonathan Wong>
Hong Kong’s de facto central bank cut its key interest rate to 4.75 percent, the lowest level since December 2022, after the Fed cut its interest rate by the same amount to a range of 4.25 to 4.50 percent. Both institutions cut their policy rates by a full percentage point in 2024, while local commercial banks cut their prime rate, the interest rate offered to their best customers, by 62.5 basis points.
However, the Fed’s rate outlook was aggressive, pointing to just two cuts in 2025.
“The [Fed’s rate cut] The decision will depend on inflation and unemployment rates, as well as the general economic environment,” said Eric Tso Tak-ming, chief vice president of mortgage broker mReferral.
“If inflation remains under control, the Fed could cut rates at least three times, bringing rates down to 3.75 percent next year. Hong Kong lenders may follow this and reduce their base rates.”
Bank of China (Hong Kong), HSBC and its subsidiary Hang Seng Bank have set their prime rate at 5.25 percent, while it currently stands at 5.5 percent at Bank of East Asia, Standard Chartered and ICBC Asia. The lowest prime interest rate in Hong Kong has fallen to 5 percent. From 2009 to 2018 and again from 2019 to November 2022 it was at this level.
“A continued trend of interest rate cuts will lower borrowing costs and reduce mortgage repayments, which will benefit Hong Kong’s property market and overall economy,” said Raymond Yeung, chief economist for Greater China at ANZ Banking Group.
The HKMA has followed the Fed’s monetary policy under its pegged exchange rate system since 1983, but it is up to commercial banks to decide the timing of their prime and deposit rates.
Yeung believes Hong Kong lenders will continue to cut base rates as they compete for mortgage and other bank loans.
“We expect two 25 basis point rate cuts by the Fed and HKMA in 2025, while Hong Kong lenders would cut rates by 12.5 basis points next year,” said Ryan Lam Chun-wang, Hong Kong head of research at Shanghai Commercial Bank .
Even after the rate cuts, Hong Kong’s effective mortgage rate would still be above 3 percent, which is higher than residential rental yields, he added.
“So there is still room for a further decline in house prices,” Lam said.
Others are more optimistic about the interest rate outlook for next year.
Tommy Ong, managing director of TO & Associates Consultancy, expects the Fed to cut rates three times next year for a total of 75 basis points, while Hong Kong lenders will cut the prime rate twice for a total of 0.25 percentage points, bringing it to 0.25 percentage points. historic low of 5 percent.
“Further cuts in interest rates would boost demand for investment in rental properties,” Ong said. “But house price growth will be limited due to high inventory levels and somewhat high absolute interest rates.”
Ong expects property prices to rise by about 8 percent next year.
“For the investment market, a low interest rate environment implies greater liquidity, which is beneficial to market performance and also eases depreciation pressure on currencies in the Asia-Pacific region,” said Kenny Ng Lai-yin, strategist at Everbright Securities. International.
Ng believes the US will cut rates twice next year, for a total of 50 basis points.
The only dissenting voice on the rate cut in the Post poll is Philip Tso, head of institutional affairs for Asia Pacific at Allianz Global Investors. He believes the US will pause interest rate cuts in the near term.
“We think the Fed is likely to exercise more caution in shifting policy to neutral, with a good chance of overlooking the opportunity to cut in January when assessing the incoming data,” Tso said.
“Market prices have shifted to reflect the Fed’s less dovish policy outlook, with the Fed funds rate now expected to be just below 4 percent in June 2025.”