Hong Kong Cuts Base Lending Rate to Boost Liquidity

By James Peng

Oct. 8 (Bloomberg) -- The Hong Kong Monetary Authority cut its benchmark interest rate to help boost bank lending as the city's economy slows.

The base lending rate to banks will drop to 2.5 percent from 3.5 percent from tomorrow, based on the level of the U.S. benchmark target rate plus 50 basis points, down from 150 basis points, Chief Executive Joseph Yam said today. The HKMA tracks the Fed Funds rate, which is now at 2 percent, because Hong Kong's currency is pegged to the dollar.

Australia yesterday cut its benchmark interest rate by one percentage point, the most since a recession in 1992, sparking speculation that other countries will follow to unlock credit markets. Banks around the world have been hoarding cash, driving up lending rates, even as financial authorities pump money into the financial system.

``The monetary authority will be anxious to ease conditions in the face of what they see as a downward spiral in the global economy,'' said David Cohen, an economist at Action Economics in Singapore. ``Around the world, a lot of these traditional formulas have been thrown on their head by this turmoil and panic.''

``Hong Kong's banking system is very stable but we are facing challenges,'' Yam said. His comments were translated by an HKMA official.

To contact the reporter on this story: James Peng in Hong Kong at jpeng7@bloomberg.net;