Hong Kong follows Fed with rate hike, adding to economy’s woes
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The Hong Kong Monetary Authority (HKMA) raised its benchmark interest rate for a sixth time, moving in lockstep with the US Federal Reserve.
The base rate was increased by 75 basis points to 4.25 per cent on Thursday (Nov 3), hours after the Fed boosted its rates by the same magnitude to tame severe inflation. Hong Kong’s de-facto central bank raises rates in tandem with the Fed, given the local dollar’s peg to the US dollar.
Attention will turn later in the morning to Hong Kong’s biggest banks, which may revisit their main lending rates in light of the HKMA decision. In September, HSBC Holdings and Standard Chartered hiked their prime rates for the first time since 2018 after the HKMA raised rates by 75 basis points.
Higher borrowing costs add to headwinds facing Hong Kong’s economy, which has been buffeted by weak global demand, a slow reopening after years of pandemic isolation, and a talent exodus amid political turmoil.
Economists this week downgraded their full-year growth forecasts for the city after gross domestic product shrank 4.5 per cent in the third quarter, far worse than expected.
The data showed a sharp contraction in investment last quarter, a sign that rising borrowing costs are curbing demand, especially in the property market, which had previously enjoyed more than a decade of low, stable borrowing costs.
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HSBC’s Hong Kong chief executive Luanne Lim signalled in September that the lender was at the “beginning of an upward cycle”. The three-month interbank rate has already reached its highest level since the global financial crisis in October 2007.
Hong Kong banks will likely raise their prime rates by another 12.5 basis points Thursday, said Natixis economist Gary Ng. He warned that too aggressive hikes could curb consumer borrowing further.
The Fed’s aggressive monetary tightening has also raised concerns about the sustainability of Hong Kong’s linked exchange rate system. On Wednesday, HKMA chief executive Eddie Yue told Bloomberg TV that the city had no plans to change its dollar peg, which is backed by strong buffers, deep foreign exchange reserves and a robust banking system. BLOOMBERG
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