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Hong Kong Monetary Authority (HKMA)

Hong Kong money market rate hits nine-year high, pushing up mortgage lending rates

A period of elevated Hibor rates will likely trigger a rise in prime lending rates, analysts say

PUBLISHED : Tuesday, 28 November, 2017, 7:28pm
UPDATED : Tuesday, 28 November, 2017, 11:30pm

Mortgage lending rates rose in Hong Kong on Tuesday, as the city’s main benchmark lending rate hit a nine-year high amid strong demand for Hong Kong dollars.

One-month interbank rates in Hong Kong rose to 0.9611 per cent, up from roughly 0.367 per cent in June.

More than 95 per cent mortgages in Hong Kong are linked to Hibor, according to data from mortgage brokerage mReferral.

The city’s largest banks offer mortgages for new customers at Hibor plus 1.4 percentage points, so as Hibor rises, so does the cost of mortgage borrowing.

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“The major effect for mortgage holders of the rise in Hibor is that mortgages are now flipping from being Hibor-linked to the capped rate which is linked to banks’ prime lending rate,” said Sharmaine Lau, mReferral’s chief marketing officer.

Mortgages in Hong Kong can either be linked to Hibor plus an agreed amount, or the banks’ prime lending rate minus an agreed amount, and are normally priced at the lower of the two.

Bank of China Hong Kong, for example offers mortgages at prime minus 2.75 per cent, making some prime-linked mortgages cheaper than some Hibor-linked mortgages.

HSBC, Bank of China Hong Kong, and Hang Seng Bank all have a prime rate of 5 per cent, while Standard Chartered and Bank of East Asia have prime rates of 5.25 per cent.

These rates have not changed since interest rates were slashed following the global financial crisis. However, an elevated Hibor means that an increase in the prime rate is more likely.

“If Hibor remains strong … the likelihood of a prime rate hike would rise, in our view,” analysts at investment bank Nomura wrote in a note to clients.

“Another effect of rising Hibor and expectations of increases to prime rates is that more borrowers are looking to fixed rate mortgages,” said Lau.

Hibor is an average of the rate at which banks say they would lend to each other.

The higher the cost of banks’ funds, the higher the rate at which they need to lend to borrowers to make a profit.

The last time Hibor was at this level was December 2008.

Since the global financial crisis, Hong Kong has been flush with cash, as interest rates globally were at historic lows and central banks around the world created money through quantitative easing.

Consequently, with lots of funds available, banks were happy to lend to each other at low rates.

Now cash is starting to flow out of Hong Kong, and banks are charging higher interest rates.

The spike in Hibor was partly a result of actions taken by the Hong Kong Monetary Authority, Hong Kong’s de facto central bank, which withdrew HK$80 billion (US$10.26 billion) from the market between August and October. Another factor was the normalisation of the liquidity environment as central banks rolled back their quantitative easing programmes, Nomura analysts said.

The Federal Reserve has raised interest rates four times since December 2015, causing US dollar Libor (London Interbank Offered Rate) – the major global benchmark for the US dollar – to rise.

However, even though the HKMA followed the Fed in raising rates, as it is obliged to do under the currency peg, Hibor lagged behind Libor. One reason was the flood of money from the mainland into Hong Kong.

This is now starting to change as the interest rate gap between the Hong Kong dollar and the US dollar rises.

A number of large IPOs have also driven demand for Hong Kong dollars.

Cash flowing into Hong Kong keeps lending rates down, but for how much longer?

However, while it is bad news for mortgage holders, a rising Hibor may help those looking to get on the housing ladder.

“The increase in local interest rates may in turn weigh down the overheated housing market,” said OCBC economists Tommy Xie and Carrie Li in a note.