Hong Kong raises benchmark rate again after US Fed tightens

THE Hong Kong Monetary Authority raised its benchmark interest rate by 50 basis points, following the US Federal Reserve’s move to hike rates for a second time this year.

The HKMA’s base rate was increased to 1.25 per cent from 0.75 per cent, it said in a statement on its website Thursday (May 5). Monetary policy in the city moves in lockstep with the Fed since the Hong Kong dollar is pegged to the US currency.

The Fed’s hawkish path is putting pressure on Hong Kong, which is hiking rates even as its economy has been throttled by virus restrictions and trade disruptions stemming from outbreaks in China. Hong Kong has accelerated its re-opening by lifting restrictions, but there’s still plenty of uncertainty around China’s economic outlook.

Local banks will decide later Thursday whether to change their best lending rates in line with the HKMA. In March, HSBC Holdings and Standard Chartered both announced their rates would stay unchanged. 

Banks are unlikely to raise lending rates this time around either, as the property sector and broader economy in Hong Kong and China remain under strain, Lloyd Chan, senior economist at Oxford Economics, said before the HKMA’s announcement. There’s also ample liquidity in the banking system, he added. 

“Banks have a large deposit base and funding costs are low, so they are able to keep their best lending rate unchanged for quite a while,” Chan said before the Fed announcement Wednesday. During the last Fed rate hike cycle from 2015 to 2018, bank rates in Hong Kong only started to move up marginally toward the end of that time period, he added.

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The local dollar is also coming under pressure as rising US interest rates reduce the appeal of Hong Kong assets. The currency has slid toward the weak end of its trading band for the first time in more than 3 years, and a breach would prompt the HKMA to intervene in the foreign exchange market. 

Those developments have fuelled debate about the sustainability of the Hong Kong dollar’s peg to the US dollar. HKMA Deputy Chief Executive Edmond Lau said last month the linked rate system is running smoothly and there are no plans to change it. BLOOMBERG