OCBC Bank interest rate strategists Zhang Shuxian and OCBC Bank Hong Kong economist Jiang Jing issued a rate cut report, expecting that for the remainder of this year, the Federal Reserve will cut interest rates by 50 basis points, with 25 basis points cut in each of the remaining two meetings. At the same time, they maintain their view that there will be a total reduction of 125 basis points by 2025.

The report points out that although the 50 basis point rate cut exceeds the predictions of most economists, it did not disappoint the market. However, unexpectedly, US treasury yields and the US dollar initially rose. The bank believes that the following factors can explain this abnormal market reaction. First, the market had already priced in enough dovishness, and investors had already reduced their positions before the Open Market Committee meeting. Second, Federal Reserve Chairman Powell's post-meeting remarks were not particularly dovish. Third, the dot plot shows that the median forecast for 2025 has a reduction of 100 basis points, while the market has already priced in a reduction of more than 125 basis points.

Setting aside the initial market reaction, as the Federal Reserve further cuts interest rates, short-term US dollar interest rates will remain on a downward trend. In the short term, due to the continued weak demand for Hong Kong dollar loans and the absence of strong inflows of funds, Hong Kong dollar interest rates may closely follow the downward trend of US dollar interest rates. Looking ahead, the bank believes that the pace of decline in Hong Kong dollar interest rates will be slower than that of US dollar interest rates in the medium term, especially when loan demand and inflows of Hong Kong dollars rebound.

In addition, several local commercial banks announced earlier that they would lower the Hong Kong dollar prime rate by 25 basis points, a reduction that exceeded expectations. This may be due to the consideration of the Hong Kong dollar interest rates continuously following the decline of US dollar interest rates since July, as well as the preemptive rate cut action by the Federal Reserve. Accordingly, the bank lowered its forecast for the Hong Kong dollar prime rate for the remaining period of this year, expecting a reduction of 25 basis points, which will not follow the magnitude of the rate cuts by the Federal Reserve.

The bank expects that the transmission effect from the Federal Reserve's interest rate decisions to the Hong Kong dollar prime rate decisions will be about 33% to 50% within the year. This is mainly because local banks did not follow the rate hikes in the previous cycle by the Federal Reserve, resulting in a relatively narrow spread between the prime rate and the front-end Hong Kong dollar interbank offered rate. Secondly, since the current Hong Kong dollar interest rate is significantly lower than the US dollar interest rate, it is believed that the future reduction will be limited.