In its commentary on its November 6 rate cut -- the tenth so far this year, reducing the short-term federal funds rate by 4.5 per cent since January -- the fed indicated that it was still worried more about a weaker U.S. economy than higher inflation.

"For the foreseeable future, then, the [Federal Open Market] Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness.

"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favourable and should become evident once the unusual forces restraining demand abate."

This suggests there could be further rate cuts as early as December.

For Hong Kong savers, this is, of course, bad news. They have already seen the basic savings deposit rate fall from 4.35 per cent at the start of the year to its present level to 0.25 per cent. This cuts their earnings and is a major disincentive to save -- provided there are relatively safe alternative investments available.

For potential borrowers, however, the lower rates are a major benefit, with banks now offering loans for many purposes (but especially housing mortgages) at well below their published best lending rates.

The problem on the borrowing side is not the availability of funds, or their price (the going interest rate), but the demand. Confidence in the economy remains extremely low and until it returns in some strength, borrowers are likely to remain scarce.

But for most the period from the onset of the East Asian financial crisis in late-1997, Hong Kong has been experiencing consumer price deflation (and especially property price deflation) and this has meant the real cost of money has been high.

This has put off many borrowers and continues to do so. Why borrow at even low nominal interest rates when deflation may continue and there is widespread concern about the economy and the future of both property and share prices?

This is the bind the local economy finds itself in. It will also be a difficult situation to get out of until there is a distinct turnaround in the U.S. and global economies and a consequent improvement in the prospects for the Hong Kong SAR.

Looked at from this historical perspective, the current levels of real -- as opposed to nominal -- interest rates in Hong Kong have a long way to go before they are the lowest on record.

Right now, after taking account of price deflation, the real Hong Kong dollar savings deposit rate is still 1.25 per cent plus, and the best lending rate is more than 5.5 per cent.

The difference between then and now is that back then in the boom years up to 1997 Hong Kong had significant levels of inflation (whether measured by the consumer price index or anything else) and now it continues to suffer from the phenomena of consumer price deflation.

For better economic times to return it is going to take perhaps more interest rate cuts (which will pose an interesting problem for the banks with nominal deposit rates already close to zero). But these will not be enough by themselves.