Lending Rate example essay topic

Hong Kong banks responded to the changes in the currency peg by immediately lifting their lending and deposit rates by half a percentage point yesterday. The move shook the property market, with some real estate agents predicting the rates rise could see property sales in the secondary market fall as much as 20 per cent next month. Equity investors took the well-flagged peg adjustment in their stride, however, with the Hang Seng Index edging higher for the first time this week. It finished up 0.53 per cent, although the lending rate rises in the afternoon did push the index off its earlier peak and sparked selling of property stocks. Climbing interest rates could also dampen spending, said Goldman Sachs economist Enoch Fung. 'This [rates rise] is negative for household consumption, but the ongoing strong employment growth and wage growth will mitigate some of the implications.

' In the most substantial change to the Hong Kong dollar peg since it was set up 21 years ago, the Hong Kong Monetary Authority set a trading band for the local currency, with an upper limit of $7.75 to the US dollar. The Hong Kong dollar will also be allowed to weaken to $7.85, compared with $7.80 today, after a step-by-step adjustment over five weeks from Monday. The introduction of a ceiling - in the past the H KMA had no obligation to defend the peg on the strong side - was aimed at bringing short-term Hong Kong interest rates in line with US rates and limiting the use of the local dollar as a tool for speculating on a yuan revaluation. The three-month Interbank rate rallied on the news and ended the day at about 3.10 per cent compared with 2.65 per cent on Wednesday. Its gap to the equivalent US rate narrowed to 18 basis points from 63 points on Wednesday.

Not everybody was concerned about the rates rise, however. ' Interest rates are still relatively low and therefore even if [the new currency system] brings them up closer to the US rates - and they don't have to be totally aligned - we are still nowhere near the highs that we used to operate under,' said David Eldon, outgoing chairman of Hongkong Bank. ' Whether this latest move will have an impact on house prices I think is too early to say. But it may do over the longer term. ' Homeowners will be among the first to feel the pain as mortgage rates will rise in step with the prime lending rate. HSBC, Hang Seng Bank and BOC (Hong Kong) will boost their prime lending rates to 5.75 per cent from 5.25 per cent and their deposit rates to 0.75 per cent from 0.25 per cent, from Monday.

Most other large and mid-sized banks, including Standard Chartered Bank, Citibank, Bank of East Asia and Wing Hang Bank, will lift their prime rates to 6 per cent from 5.5 per cent and their deposit rates to 1 per cent from 0.5 per cent. ' The impact on the housing market will be reflected in the coming weekend sales,' said Sam Ding Pui-hung, of Rica corp Properties. 'Buyers will want to rethink their buying decisions for a while and owners will be more willing to lower asking prices by 1 to 4 per cent. '.