The Hong Kong dollar has been bumping against the upper limit of its linked exchange rate system to the U.S. dollar, prompting the territory's central bank to intervene five times on Wednesday to keep its currency peg with the U.S. dollar intact.
That intervention, which injected HK$7.8 billion (US$1 billion) into the banking system, pushed down interbank rates, giving banks leeway to cut prime rates on Thursday.
The Hong Kong dollar is the second-most traded currency in Asia after the Japanese yen.
The currency peg with the U.S. dollar forces the Hong Kong Monetary Authority (HKMA) to track U.S. interest rate moves but local banks have more flexibility in setting their prime rates, the rates they charge their most creditworthy borrowers.
The central bank on Thursday lowered the base rate charged through its overnight discount window by 25 basis points to 6 percent after the U.S. Federal Reserve cut its benchmark federal funds rate by a quarter of a percentage point on Wednesday.
HSBC Holdings Plc, the territory's biggest bank, its subsidiary Hang Seng Bank and other lenders, including Standard Chartered Bank, Bank of China (Hong Kong) and Bank of East Asia, said they would reduce their prime rates from Friday by 25 basis points to between 7.25 and 7.5 percent.
They will also cut their savings rates by a quarter point.
The Hong Kong dollar is pegged at 7.8 to the U.S. dollar but can trade between 7.75 and 7.85. It fell on Thursday and was quoted at 7.7553 in late trade, after hitting its upper limit at 7.75 repeatedly on Wednesday, driven by strong demand for Hong Kong dollars to buy stocks.
Analysts said there had also been signs of speculative trade.
Speculation dissipated on Thursday after the HKMA dismissed a report by U.S.-based research house Medley Global Advisors the previous day which said Hong Kong officials had lobbied Beijing to adjust the currency peg but Beijing had refused.
The HKMA said the report was unfounded and its Chief Executive Joseph Yam said Hong Kong had no plans to re-peg the local dollar at a different level or widen its trading band.
Maybe the speculation will take a rest for a bit, said Daniel Chan, senior investment strategist at DBS Bank.
Economists say a de-pegging of the currency is unlikely. We do not foresee a break in Hong Kong's currency link, because any move would be politically too sensitive for the (Hong Kong) government and, more importantly, for Beijing, investment bank Credit Suisse said in a research note released on Thursday.
Interbank rates have been trading at six-month highs amid a global credit squeeze that has made banks reluctant to lend to each other, and amid tight demand for Hong Kong dollars to fund new listings on the stock market.
But the one-month interbank rate dropped to as low as 3.93/4.00 percent on Thursday, its lowest since February and down from 4.7 percent before the HKMA intervention on Wednesday.
Analysts said interbank rates were dampened by both Wednesday's fund injection and the U.S. interest rate cut.
Interbank rates are now back below U.S. dollar interbank rates and traders said carry trades, to take advantage of the interest rate differential by selling Hong Kong dollars for U.S. dollars, was re-emerging.