Rate cuts won't resolve global financial crisis
Updated: 2008-09-17 07:25
By Kwong Man-ki and Cheung Sim-mok(HK Edition)
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A rate cut will not help much in reviving the market, as the core of the current market woe lies in confidence rather than liquidity, an economist said yesterday.
"It's just meaningless, no matter how deep the US will trim the rates - 25 or 50 basis points," Hang Seng Bank's senior economist Irina Fan said.
"Financial institutions will still see difficulty in borrowing even if the lending rates are lowered because no one wants to lend now," she said. "A rate cut would have limited stimulation to the market."
The possibility of the US Federal Reserve (Fed) reducing rates - now standing at 2 percent - today is increasing. A number of economists expected yesterday the world's largest economy to slash rates by at least 0.25 percent, after its three financial powerhouses - Lehman Brothers, Merrill Lynch and American International Group - fell victim to a worsening credit woe.
US banks have been struggling in the past months for short-term funds to save them from bankruptcy, but the US government may not have the financial brawn to inject more money into the market or take over ailing financial houses.
So trimming lending rates seems to be the easiest move at hand, said Raymond So, an associate professor of finance at the Chinese University of Hong Kong.
"A deeper rate cut is needed to restore the liquidity in the market," he added.
Law Ka-chung, chief economist and strategist at Bank of Communications, agrees.
Interbank rates, which measure the cost for leading money among banks, rose sharply in Europe and the US after Lehman Brothers' fallout. The borrowing cost is too high and the Fed has to cut the rates to make sure financial houses can get easy credit, he said.
"The Fed has to do so," he said.
Will Hong Kong follow the US move as it usually does to maintain the currency peg?
Law said he doesn't see the need, because a rate reduction in the US, if any, is more like an emergent reaction to the market meltdown than the response to economic fundamentals.
And a further rate cut will worsen the negative interest rate problem in Hong Kong, where deposit rates have already been much lower than the inflation rate for months.
"Hong Kong simply cannot afford another rate cut," he said. Most of the deposit rates in Hong Kong have come to zero.
(HK Edition 09/17/2008 page2)