Because the HKD is pegged to the USD, the Hong Kong Monetary Authority has been more or less compelled to follow the US Federal Reserve's interest rate cuts. As a result Hong Kong's interest rates are now extremely low. Deposit rates are close to zero, even for reasonably large retail deposits, and lending rates for mortgage finance are typically in the 2-2.5% range.
Given that deposit rates cannot go below zero (if you ignore bank fees), any further cuts in interest rates in Hong Kong can only happen on the lending side which means that the banks' lending margins will be squeezed. As a consequence, the banks have been quite vocal in claiming that there is no room for further cuts in lending rates and, further, that lending rates may have to rise in order to restore their lending margins - even if the Federal Reserve cuts rates again at its next meeting.
While it is understandable that the banks will attempt to maximise their profits, this time around they are fighting market forces. Firstly, the banks have no entitlement to make a particular margin on their lending activities. In Hong Kong only certain regulated monopolies have such a right. Secondly, deposits continue to build up in the banking system (in spite of rising inflation). Even if the cost of these deposits was zero (it is not), then the banks would still be better off lending it out at reduced margins than not lending it at all. Given that all banks are in this position, in a competitive free market for lending interest rates on loans should continue to fall despite the banks' wish to be exempt from the forces of a free and competitive market.
If every other business in Hong Kong is subject to market forces and competition there is no reasons why banks should be exempt or why borrowers should have to pay a premium above the rate set in a free market to subsidise the banks' already huge profits.
No comments:
Post a Comment