Hong Kong banks have limited room to cut prime rates, HKMA official says

Hong Kong’s retail banks have little room to further cut their prime lending rates as net interest margins have already fallen to very low levels, a senior Hong Kong Monetary Authority official said.

Arthur Yuen Kwok-hang, the authority's deputy chief executive, savings deposit rates have dropped to near zero, and any further reduction in the prime rate could put additional pressure on banks’ net interest margins, weakening their ability to withstand risks.

However, Yuen noted that if the US Federal Reserve begins easing policy, Hong Kong interbank offered rates are likely to fall in tandem, which would benefit most corporate borrowers whose loans are linked to Hibor.

The Fed is set to announce the outcome of its first meeting of the year early on Thursday Hong Kong time. Markets widely expect US interest rates to remain unchanged, though investors still anticipate two to three rate cuts later this year.

Yuen added that while the Fed cut rates in December, Hong Kong banks kept their prime rates unchanged, a move he said was widely expected. Since the US entered a rate-cut cycle in September 2024, Hong Kong retail banks’ net interest margins have continued to narrow, falling three basis points year-on-year to 1.47 percent in the first three quarters of last year — a level that is low by international standards, he said.

By comparison, net interest margins for US banks are above 2 percent, while banks in other major markets typically report margins of around 1.8 percent to 2 percent, Yuen said.