1.The Federal Open Market Committee of the Federal Reserve (the Fed) just announced its decision to cut the federal funds rate by 50 basis points, to 4.75-5%.  The HKMA has reduced the Base Rate to 5.25% according to the established mechanism with immediate effect.

2.During the Fed's most recent rate-hike cycle that started from March 2022, interest rates were raised by a total of 5.25 percentage points. By now various indicators show that inflationary pressure in the US has eased.  With signs of labour market cooling down, the Fed's 50-basis-point rate cut is largely in line with market expectations.

3.The “dot plot” indicated that the Fed might continue to cut rates by a total of 50 basis points before year end, followed by a total of 100 basis points next year. However, the pace of future rate cuts remains uncertain because of multiple factors, such as whether inflation would stay at low levels, changes in labour market condition, and how the economy would react to the rate cuts.  In short, the market is likely to remain very sensitive to economic data and political and economic risks.  Investors should stay alert to the risk of global financial market volatility.

4.In Hong Kong, our financial and monetary markets have continued to operate in a smooth and orderly manner. Market liquidity condition has remained stable, with the Hong Kong dollar exchange rate hovering within the Convertibility Zone.  Under the Linked Exchange Rate System, Hong Kong dollar interbank rates, especially those of the longer tenors, generally track the US dollar counterparts, while shorter-tenor interbank rates tend to be influenced by the supply and demand of Hong Kong dollar funding in the local market, such as seasonal effects and capital market activities.

5.Overall speaking, under the Linked Exchange Rate System, when US dollar interest rates decline, there would be room for market interest rates in Hong Kong to ease. This will have a positive impact on the economy.  With regard to deposit and lending rates, banks will normally take into account factors such as funding supply and demand in the interbank market, the level of interbank rates and their own funding cost structures.  In any case, the rate-cut cycle has only just begun.  Interest rates will remain at relatively high levels in the foreseeable future.  The public should carefully assess and continue to manage the interest rate risk when making property purchase, mortgage or other borrowing decisions. 

6.Rate cuts in the US will not affect our financial and monetary stability. That said, as monetary policies across the major economies are not entirely in sync, the risk of global financial market volatility cannot be ruled out.  A timely reminder was the sharp adjustments seen in the financial markets in early August.  The HKMA will continue to closely monitor market developments to ensure financial and monetary stability.