THE Hong Kong Monetary Authority (HKMA) raised its benchmark interest rate by 25 basis points on Thursday (Mar 23), following the lead of the Federal Reserve which hiked rates even as the unfolding bank crisis sent jitters through financial markets.

The base rate was increased to 5.25 per cent from 5 per cent, according to a statement from the HKMA on Thursday.

Attention will now turn to whether the city’s biggest banks, including HSBC Holdings and Standard Chartered, will change their best lending rates.

Given that the HKMA rate moves in lockstep with the Fed’s rate — the Hong Kong dollar is pegged to the US currency — the local bank rate decisions are considered the more important moves to watch.

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

HSBC, Standard Chartered and other big banks raised their lending rates a few times last year as the city’s monetary policy tightening became more aggressive. But lately there hasn’t been a lot of pressure on the banks to keep doing so.

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The one-month Hong Kong Interbank Offered Rate — a rate known as Hibor that represents a daily average of what banks say they would charge to lend each other — is 34 per cent lower than its recent December high.

The banks all held those rates in February, the last time the HKMA hiked.

Ongoing tumult in the banking sector, though, has raised some questions about the stability of the global financial system and in turn, some of the world’s largest banks.

Shares of HSBC and Standard Chartered fell earlier this week as investors tried to figure out whether the UBS Group takeover of beleaguered Credit Suisse Group had any effect on the value of additional tier 1 bonds issued by lenders, such as HSBC.

The concern ultimately comes down to whether there’s a loss of confidence or risk of exposure as ripple effects from Credit Suisse play out. A brief cash squeeze in Hong Kong this week showed how high the stakes are.

On Tuesday, the overnight Hibor soared the most since Bloomberg started compiling the data in 2006, jumping 253 basis points to 4.14 per cent. The one-month gauge has its biggest gain since 2008. The two rates fell on Wednesday.

The city’s monetary authority attributed the surge in interbank funding rates to demand for the local currency amid market volatility and quarter-end needs. BLOOMBERG