Hong Kong’s banks raise prime rates for the first time in 4 years as cost of money soars to 14-year high

HSBC, Standard Chartered, Bank of China (Hong Kong), Hang Seng Bank and Bank of East Asia raised their best lending rate for borrowers by 12.5 basis points
The first increase in prime rates in four years will hurt the property market and Hong Kong’s economy, analysts say

Banking & finance

Enoch Yiu

Published: 12:35pm, 22 Sep 2022

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Five of Hong Kong’s largest banks said they would raise their prime rates for the first time in four years, taking the lead to increase the cost of money as surging interest rates spill over to the city’s households and corporate borrowers.

The best lending rate of HSBC, Bank of China (Hong Kong) and Hang Seng Bank will rise by 12.5 basis points to 5.125 per cent starting on Friday, Monday and Tuesday respectively, while the prime rates of Standard Chartered and Bank of East Asia will increase to 5.375 per cent. The savings rate on Hong Kong dollar deposits will go up by 12.4 basis points, the five banks said.

The moves followed the 75-basis point rate increase by the US Federal Reserve overnight, which was mirrored by an increase of the same magnitude by the Hong Kong Monetary Authority (HKMA).

“Anticipation around a potential prime rate increase in Hong Kong has been ripe and today’s announcement marks the beginning of an upwards cycle,” HSBC’s Hong Kong chief executive Luanne Lim said in a statement. “We have considered multiple factors, including the macroeconomic environment, [the interbank rate] trends as well as the impact on our economy and the community.”

Pedestrians walk past a branch of the HSBC bank at Pedder Street in Hong Kong’s Central district on 26 July 2022. Photo: Yik Yeung -man

Other banks are expected to follow the lead by Hong Kong’s major banks. The last time the lenders raised their prime rates was a 12.5-basis point increase in September 2018, as they waited through nine rounds of hikes by the monetary authorities between 2015 and 2018 before passing the higher cost of money to their customers.

“Since the economic contraction was significant in the first half, it is highly likely that negative growth will be recorded for the full year,” Financial Secretary Paul Chan Mo-po said after the HKMA’s move, adding that the government will update its full-year economic forecast in November.

Hong Kong’s homebuyers had HK$1.78 trillion (US$227.13 billion) in mortgage loans at the end of July, with the average mortgage at HK$5.07 million, according to the HKMA. Borrowers who tie their loans to the prime rate will face higher payments when the higher rate kicks in.

Hong Kong’s Financial Secretary Paul Chan Mo-po during an interview at the Central Government Offices (CGO) in Tamar on 25 July 2022. Photo: Nora Tam

The payment of a typical HK$5 million, 28-year loan with a 2.75-percentage point discount to the prime rate will increase by 1.6 per cent, or HK$323, to HK$21,029 per month, according to mReferral, a local mortgage broker.

“The prime rate increase with the recent surge of interbank rates will mean higher interest payments for mortgage borrowers,” said Eric Tso Tak-ming, chief vice-president of mReferral. “This will have a negative impact on the property market.”

The monetary authorities are not likely to let up, as the Fed chairman Jerome Powell has pledged to “keep at it” until the inflationary pressure in the US economy is brought under control at the central bank’s target of 2 per cent or less. Economists expect high interest rates to remain until the end of 2023.

The world’s most powerful monetary authority has now increased its key rate by 75 basis points three times in the past four months to tame runaway inflation. US consumer prices surged at an annual rate of 8.3 per cent in August, slower than the preceding two months but still hovering near a four-decade high.

“Interest rates will continue to rise [and] the level of bad debt in Hong Kong may gradually rise,” warned the HKMA’s chief executive Eddie Yue Wai-man after the de facto central bank raised its base rate. “The public should be prepared for banks to increase the commercial interest rates, and carefully assess and manage the relevant risks when making property purchase, mortgage or other borrowing decisions.”

Hong Kong’s banks have waited through five rounds of rate hikes this year before moving. More pain is in store for Hong Kong’s borrowers, as the HKMA has been conducting its monetary policy in lockstep with the Fed since 1983 to maintain the local currency’s peg to the US dollar.

Hong Kong’s base rate soars 75 basis points to the highest in 14 years

“The US will continue to raise the Fed’s rate until 2023, and Hong Kong has to follow the interest rate rise cycle,” said ANZ’s Greater China chief economist Raymond Yeung. “It will add pressure on the property market and will hurt the weakened economy.”

Global stock markets fell after the Fed’s latest move, with 20 of the Asia-Pacific region’s 27 major benchmarks declining in Thursday trading. Hong Kong’s Hang Seng Index fell by as much as 2.6 per cent to an 11-year low before recouping some of the losses to end the day 1.6 per cent lower.

The cost of funds is now at the highest in Hong Kong since March 2008, when the base rate was at 3.75 per cent during the global financial crisis.

Will interest rate rises dampen Hong Kong’s love affair with property?

In Hong Kong, many outstanding home mortgages are based on prime, the rate that banks charge their best customers. The prime rate is used as a benchmark to price many personal and corporate loans.

Most banks price their mortgage rates at discounts of between 2.5 and 3 percentage points to the prime rate. For personal unsecured overdraft, banks charge about 5 to 7 percentage points on top of the prime rate.

“The impact of a prime rate hike on the local stock and property markets in the near term should be limited, as any responses to higher interest rates should have long been reflected in the market,” said OCBC-Wing Hang Bank’s economist Cindy Keung. “Going forward, in the absence of major changes in Fed’s rate hike trajectory, the stock and property markets will be more sensitive to the oscillating risk sentiment and recession fear.”

This is the main culprit behind the Hong Kong dollar’s slump

The Fed, which raised its rate five times this year, is expected to take the target rate to a 15-year high of 4 per cent by early 2023, from the current range of 3 to 3.25 per cent, according to Schroders’ senior European economist and strategist Azad Zangana.

“Higher interest rates, less generous government spending and higher inflation all work to reduce the spending power of households,” Zangana said in a note. “Companies are likely to respond to weaker demand by slowing production, and reduce [the] demand for labour.”