Zero Interest Rates

The Standard & Bloomberg: Hong Kong bank customers will be earning virtually no money on their deposits as lenders slashed their rates in wake of the US Federal Reserve's move to cut its key interest rate, bringing their saving rates practically to zero percent.

Two of the city's major lenders, Hongkong and Shanghai Banking Corp, and Hang Seng Bank, will offer an interest rate of 0.01% for deposits of more than HK$5,000. This means that, starting from today, their customers will receive HK$1 interest a year on a deposit of HK$10,000 or HK$100 on HK$1 million.

And, at HSBC, depositors whose monthly balances are less than HK$5,000 will not only receive no interest at all, they will be charged a monthly fee of HK$50 to boot. Senior citizens over 65 or recipients of the Comprehensive Social Security Assistance Scheme will be exempted from the charge. Standard Chartered Bank (Hong Kong) and others offer slightly better deposit rates. Standard Chartered will pay 0.05 percent interest for deposits under HK$500,000.

Although depositors will feel squeezed by the lower savings rates, homeowners will rejoice, as banks have lowered their prime lending rates by half a percentage point. Some 25 percent of Hong Kong's households have mortgages.

Hang Seng, HSBC and Bank of China (Hong Kong) lowered their best lending rate by to 5.25 percent from 5.75 percent, while Standard Chartered, DBS Bank (Hong Kong), and others cut their prime rates by 50 basis points to between 5.5 percent and 5.75 percent.

The market is expecting the Fed to lower the benchmark interest rate by another 50 basis points at its next meeting on April 29-30.

With benchmark lending rates to the lowest in three years, this is adding to inflationary pressures that are straining the city's 24-year-old fixed exchange rate.

``With the latest Fed rate cut, the timing is now ripe for a Hong Kong dollar de-peg,''

With the depreciating dollar, Hong Kong's currency has declined 8.2 percent in the past year against the yuan, driving the cost of imported goods higher. One yuan now buys 1.1 Hong Kong dollars. The peg survived the 1998 Asian financial crisis and the 2003 outbreak of severe acute respiratory syndrome.

CPI rose 3.2 percent in January from a year earlier. Eliminating the effect of a property-rate waiver, inflation accelerated to 4.3 percent, the fastest since May 1998.