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HKMA to adjust the formula for determination of the Base Rate The Hong Kong Monetary Authority (HKMA) announced today (Wednesday) an adjustment in the methodology for the determination of the Base Rate in Hong Kong. The Base Rate is the reference on which the interest rates charged by the HKMA for different types of borrowings by licensed banks through the Discount Window are calculated. Overnight borrowings through the Discount Window, for example, are charged the Base Rate and term borrowings are charged at a premium over the Base Rate. At present, the Base Rate is set at either 150 basis points above the prevailing US Federal Funds Target Rate (FFTR) or the average of the five-day moving averages of the overnight and one-month HIBORs, whichever is higher. The HKMA announces the Base Rate everyday before the interbank market opens in Hong Kong. With effect from 9 October (Thursday), this formula for determination of the Base Rate will be changed by reducing the spread of 150 basis points above the prevailing FFTR to 50 basis points (Annex). The Base Rate will be adjusted according to this new formula and announced before the interbank market opens this Thursday. Mr Joseph Yam, the Chief Executive of the HKMA, said that this change would amount to a cut in the interest rates for borrowings through the Discount Window by 100 basis points. The practice in most jurisdictions is for there to be a penal element in the discount rate to discourage over-dependence by banks on day end liquidity provided by the central bank. "This penal element, hitherto fixed at 150 basis points, is larger in Hong Kong than elsewhere, and has become unjustified, particularly in the light of stressful conditions in global financial markets," Mr Yam said, "hence the cut of 100 basis points to 50 basis points." "As a result, there will be a cut in the Base Rate, effective tomorrow, from 3.5% to 2.5%," Mr Yam added.
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