Hong Kong follows Fed to slash its base rate to 0.5%

Special Report:Global Financial Crisis

HONG KONG, Dec. 17 (Chinese media) -- The Hong Kong Monetary Authority (HKMA) announced here Wednesday the adjustment downwards of the Base Rate to 0.5 percent with immediate effect following the U.S. Federal Reserve's surprising rate cut.

Since the U.S. federal funds target rate is reduced to the range of zero to 0.25 percent and federal funds are effectively trading at zero, the HKMA, Hong Kong's de facto central bank, set the Base Rate at 50 basis points above the lower boundary of the target range at 0.5 percent.

Joseph Yam, the HKMA Chief Executive, said he believed the effect of monetary policy to boost the economy will subside after the Federal Reserve cut its federal funds target rate to the range of zero to 0.25 percent.

Yam said he expected the Federal Reserve to adopt a quantitative easing policy, which means to print new money to increase the size of money supply and boost the market liquidity.

He said the HKMA has acted in the past four days and injected 36 billion HK dollars (4.65 billion U.S. dollars) into the market, raising the aggregate balance in local banking system to a new record high of more than 113.9 billion HK dollars (14.7 billion U.S. dollars).

"I believe such injection will help the banks support the economy under a loose monetary policy," Yam said.

Under Hong Kong's linked exchanged rate system, the Base Rate is the interest rate forming the foundation upon which the Discount Rates for repurchase-agreement transactions through the Discount Window are computed.

According to the new formula announced on Oct. 8, 2008, the Base Rate is set at 50 basis points above the prevailing U.S. federal funds target rate.