Hong Kong raises base rate as US Fed tightens, hints at final move

THE Hong Kong Monetary Authority (HKMA) raised its benchmark interest rate by 25 basis points on Thursday (May 4), following the US Federal Reserve for what may be the final hike of its tightening campaign.

Hong Kong’s base rate was increased to 5.5 per cent from 5.25 per cent, according to a statement from the HKMA on Thursday. The rate moves in line with the Fed’s benchmark in order to protect the local dollar’s peg to the greenback.

Now attention will turn to any moves the city’s biggest banks – including HSBC Holdings and Standard Chartered – will announce later in the day, including changes to their best lending rates.

The best lending rates in Hong Kong are used as a base for banks to quote interest rates on mortgage loans, so they have the ability to encourage more lending and borrowing no matter what happens with the HKMA base rate.

The HKMA has been intervening in the foreign exchange market to protect its currency peg, draining liquidity from the financial system and, in turn, pushing up short-term interbank rates. That raises the funding costs for banks and puts pressure on them to hike their lending rates in order to maintain their profits.

The one-month Hibor has climbed to 3.4 per cent, the highest since Mar 21, and narrowing the spread with its US equivalent Libor to 1.6 per cent percentage points. Further currency defence is likely, given the Hong Kong dollar remains at the weak end of its trading band.

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Fed watchers expected this rate increase to be the central bank’s final hike for a while, as tighter lending conditions and signs of a slowing economy suggest inflation will cool in the months ahead.

HSBC Holdings said in an earnings release this week that while interest rates “remain elevated in most of our major markets, current market expectations indicate that policy tightening may be close to its peak, and global inflation appears to be levelling out”.

For Hong Kong, a pause in rate hikes may bring some relief as the city stages its economic recovery.

The economy finally emerged from recession in the first quarter as the reopening of its borders revived spending, according to data this week. The economy expanded 2.7 per cent in the three months to March from a year earlier, topping forecasts. It was the first quarterly gain in gross domestic product in more than a year. BLOOMBERG