By Noah Sin and Donny Kwok
HONG KONG (Reuters) - Hong Kong's central bank cut its benchmark interest rate in its first policy easing since late 2008 on Thursday, tracking the U.S. rate reduction overnight, although heightened demand for cash in the city is expected to keep funding costs elevated.
The Hong Kong Monetary Authority keeps its policy in lock-step with the U.S. Federal Reserve as the city's currency is pegged to the greenback at a tight range of 7.75-7.85 per dollar.
On Thursday, the HKMA cut the base rate it charges through its overnight discount window by 25 basis points to 2.5%. The Fed cut rates on Wednesday for the first time since the global financial crisis, reflecting central banks' bias towards easing policy amid slowing global economic growth and the protracted Sino-U.S. trade war.
HKMA Chief Executive Norman Chan warned on Thursday morning the Hong Kong Interbank Offered Rate (HIBOR), which provides a benchmark for many local currency loans, may not immediately track the Fed's move given domestic liquidity pressures.
He said Hong Kong's rates may be influenced by local factors, such as large initial public offers, in the stock market.
Alibaba (N:BABA) is teeing up a secondary listing up to $20 billion (£16.5 billion) in Hong Kong, which would be the biggest secondary listing globally in seven years. Brewer Anheuser Busch InBev NV (BR:ABI) marketed but then dropped a $9.8 billion IPO for its Asia business last month.
"So I expect HIBOR would continue to be influenced by local supply and demand conditions and may not immediately follow the move in LIBOR," he said.
In a sign liquidity pressures had elevated funding costs, HSBC (L:HSBA) (HK:0005), the city's largest bank, said it would not cut the benchmark often used for mortgages in line with the HKMA's move, keeping its best lending rate at 5.125%.
Other commercial banks are expected to announce whether they will follow the HKMA's lead and trim commercial interest rates, which would affect home mortgages in one of the world's most expensive property markets.
HIBOR eased marginally across the curve on Thursday while the Hong Kong dollar was little changed at 7.8271 per dollar.
Chan said that the Hong Kong's financial market and currency have not been affected by the recent social unrest in the city. Hong Kong has been embroiled in a political crisis in past months over the controversial extradition bill.
"Financial markets, overall, have been operating normally and smoothly," said Chan.
However, retailers are taking a knock from the protests, and Hong Kong's economy grew less than expected in the second quarter as the U.S.-China trade war escalated. Some banks have lowered their growth forecasts for the city.
These headwinds could drive up the unemployment rate, currently at 2.8%, Paul Chan, Hong Kong's financial minister, said in a blogpost on Sunday.
(Additonal reporting by Clare Jim and Hong Kong Newsroom; Editing by Sam Holmes)