Hong Kong’s currency intervention pushes key banking liquidity indicator below HK$100 billion mark
- Aggregate balance fell below HK$100 billion after the Hong Kong Monetary Authority intervened to defend currency peg during New York trading hours
- Lower liquidity will add pressure on more local banks to join HSBC and peers to increase their prime rate, an analyst said
Hong Kong’s de facto central bank intervened to support the local currency peg to the US dollar, pushing a key banking liquidity indicator below the psychological threshold of HK$100 billion (US$12.7 billion) following the latest round of US Fed rate hikes this week.
The aggregate balance, or the sum of balances in clearing accounts maintained by all banks with the central bank, will fall by the same amount to HK$96.977 billion on November 8, it said, falling below HK$100 billion for the first time since June 2020. The balance has declined by 71 per cent since the first intervention on May 11.
The HKMA is obliged to step into the market to keep its currency within the HK$7.75-HK$7.85 trading band, after pegging it at HK$7.80 per dollar since 1983. It spent a total of HK$103.48 billion in 2018 to defend the peg and HK$22.13 billion in 2019, during the last two rounds of rate rise cycles, according to official data.
Eight major commercial lenders including HSBC and Standard Chartered Bank also nudged their prime rate higher by 25 basis points on Friday or Monday, prompting the HKMA CEO Eddie Yue Wai-man to warn of more pain for consumers.
“As the liquidity in the banking sector dries up, it will add pressure on [more] local commercial banks to increase their prime rate by about 25 basis points in the coming two months,” said Jasper Lo, an independent currency analyst.
The aggregate balance previously dropped below the HK$100 billion mark in August 2018, and hit a post-crisis low as HK$54 billion in March 2020. The balance only bounced back after the US cut interest rates down to zero in March 2020 to support the economy when the Covid-19 pandemic took hold.
“The continued rise in interest rates in the US and the decline in the aggregate balance mean that funds are flowing out of the banking system, while pushing up bank borrowing costs,” said Kirk Wong, a global market and forex strategist at Everbright Securities International.
Banks are expected to increase the prime rate and pass the funding costs on to their customers, he said. This would enhance banks’ profitability but increase the burden of mortgage borrowers and other types of personal or corporate loans that are linked to the prime rate.
A customer with a HK$5 million loan with a 30-year tenor will have to pay HK$656 more each month following a 25-basis-point increase, and HK$1,324 more following a 75-basis-point increase, according to data from mReferral Corporation.