Hong Kong unveils surprise interest rate cut

Hong Kong slashed its main interest rate by 100 basis points, the biggest cut since the benchmark started a decade ago, as central…

Hong Kong slashed its main interest rate by 100 basis points, the biggest cut since the benchmark started a decade ago, as central banks around the world step up efforts to halt a growing global credit crunch hammering financial markets and depressing economic growth.

Economists say the move, which takes effect tomorrow, in addition to other measures recently, will not be enough to arrest mounting interest rates or bolster the fragile local economy.

The economy may slip into recession in the fourth quarter as weakening global growth hits its exports and affects tourism.

Officials warn that endemic reluctance to lend will stymie the financial system and batter the economy, at a time the world faces its greatest financial shock since the Great Depression.

JP Morgan has warned that Hong Kong will slip into recession this quarter and next

"This will not change the overall trend of rising interest rates because the credit crisis is global and most financial institutions are hoarding their money," said Daniel Chan, senior investment strategist at DBS Bank.

Hong Kong, a global financial centre and the main investment gateway into China, follows US rate moves because its currency is pegged to the US dollar.

Futures markets see a 56 per cent chance the US Federal Reserve will cut interest rates by 75 basis points on or before October 29th

Local markets shrugged off the central bank's move. The benchmark Hang Seng Index dived 8.2 per cent, as valuations plumbed depths not seen since the 1997/98 Asian financial crisis.

"It could help banks with qualified collateral but since US interbank rates are high, there is still pressure for the prime rate to rise," said Andrew Fung, General Manager and Head of Investment and Insurance at Hang Seng Bank.

Australia's central bank yesterday said it was expanding the liquidity assistance it provides banks in money market operations, a day after slashing rates to protect its economy.

Reuters