Hong Kong Raises Base Rate After Federal Reserve Increase

Updated on
  • HKMA lifted the base rate by a quarter point to 2 percent
  • Higher borrowing costs will stoke concerns for house prices

Hong Kong’s de facto central bank followed the Federal Reserve’s lead and raised its base rate Thursday.

Because Hong Kong’s currency is pegged to the dollar, the Asian financial hub effectively imports U.S. monetary policy and adjusts borrowing costs in line with the Fed.

The Hong Kong Monetary Authority lifted the rate at which banks can borrow from it by a quarter-point to 2 percent after Federal Reserve officials raised their own benchmark lending rate a quarter-point.

Rising rates are stoking fears that Hong Kong house prices are vulnerable to a correction. Residential prices have more than doubled over the past decade making it the world’s least affordable market. The International Monetary Fund is among those to have warned about the impact of higher rates.

Household debt-to-gross domestic product is higher now than in 1997, just before a housing crash that lasted six years.

So far HKMA rate hikes have had only a limited impact. Interbank lending rates remain well below the levels of their U.S. equivalents as ample liquidity in Hong Kong’s financial system offsets the tighter policy. A booming stock market continues to lure capital.

Rate Normalization

Speaking to reporters on Thursday morning HKMA chief executive Norman Chan described expectations for rates to remain low as inappropriate.

"Although interbank rates haven’t caught up with the U.S., rate normalization will definitely happen in Hong Kong.”

The Hong Kong dollar was steady at HK$7.847 as of 9:15 a.m. local time. The currency is close to the weak end of its HK$7.75-7.85 band as the low funding costs have prompted traders to short it. When the Hong Kong dollar does reach the limit of its band, the HKMA will need to step in and mop up local liquidity -- which may increase interbank rates at a quicker pace and finally mark the end of the era of ultra-cheap money.

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