The Fed chair said on a speech that they are closely monitoring the development of US-China trade talk and will act as appropriate to sustain the expansion as the trade tension escalated. The comment signals a possibility of rate cut and the probability of such rate cut in September increased to 92% from 58% according to the Fed Fund futures. Under the linked exchange rate system, the interest rates between US and Hong Kong are co-integrated in the long run, but they are fluctuated in the short term due to liquidity and investment demands. The aggregate balance of local banks remains HKD 54 billion, representing an adequate liquidity. This implies the possibility of prime lending rate (P) hike is low. Although the HIBOR has been showing an uptrend since May this year, the momentum is capped amid slowing capital needs. In fact, 1Q2019 domestic property lending up only 5% year-on-year, the rate of increase has been slowing down for six quarters, loans for trade finance has been experienced a three-quarter declines. We expect the demand for loans of trade and mortgage remains weak if the US-China tension sustains. The factors discussed above may place pressure on local banks’ net interest margin and thus profitability.

Bloomberg, HKMA

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