Hong Kong analysts expect one last Fed rate increase in 2023, but are divided if HSBC and peers will raise prime rates

Twelve analysts surveyed by the Post expect the Fed to raise its key rate this week, with most agreeing it would likely be the last increase in the current cycle
They are equally divided if HSBC, Standard Chartered and other local banks will refrain from increasing their lending rates amid a rise in funding cost

Banking & finance

Enoch Yiu

Published: 8:00am, 3 May 2023

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The Federal Reserve is likely to make its last interest-rate hike in the current tightening cycle in a widely expected move later this week, analysts said. Still, they are divided on whether the city’s leading commercial banks will raise their lending rates.

That decision and subsequent reactions will be front and centre for global markets this week as Fed policymakers meet in Washington on Wednesday. They are odds-on to lift the target rate by a quarter-point, to a range of 5 per cent to 5.25 per cent, according to Fed fund futures. That would be the 10th straight increase since March 2022, totalling 500 basis points.

“The US rate-hike cycle will end after this week’s meeting,” said Kirk Wong, global markets and foreign-exchange strategist at Everbright Securities International. “Many US lenders have tightened their loan policies, hence individuals and corporates have found it hard to get funding” after several bank failures this year, he added.

The risk of recession in the US has increased, says Kirk Wong, a strategist at Everbright Securities. Photo: Enoch Yiu

All 12 Hong Kong-based analysts surveyed by the Post last week were unanimous in their view on the hike. Eight of them, including Wong, said the Fed would then pause to reassess recession risks. Four others believed the US policy “lift-off” that began in March last year may persist, given the still-elevated inflation pressure.

The analysts, however, are equally split on whether HSBC, Standard Chartered, Bank of China (Hong Kong) and their local peers will raise their prime rates. Hong Kong banks raised their lending rates only three times in 2022 while the Fed tightened seven times. They did not follow the Fed’s two increases earlier this year.

This has left the local stock market in a bind, with the Hang Seng Index struggling to regain upside momentum after sliding 12 per cent from this year’s peak in late January in a HK$4.8 trillion (US$610 billion) rout. Also at risk is a nascent recovery in domestic home prices, which climbed to a six-month high in March.

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Bruce Yam, an independent currency analyst, said investors should brace for higher borrowing costs, citing renewed pressure on the Hong Kong dollar from the widening gap between local and US interest rates.

“Funds are flowing out of the Hong Kong market while the increase in Hibor since early April is pressuring their funding costs,” said Yam, who previously worked at Everbright Sun Hung Kai Securities. “Banks are likely to increase their prime rates this week by 12.5 or 25 basis points.”

The Hibor, or Hong Kong Interbank Offered Rates, is the rate at which banks lend to each other. The one-month rate was quoted at 3.3 per cent on April 28, versus 5.02 per cent for US dollar Libor, according to data published by the Hong Kong Association of Banks. The gap of 172 basis points widened from 163 three months ago.

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Since the Fed lift-off, the HKMA entered the global foreign exchange market to protect the local currency peg, buying up almost HK$289 billion in 48 interventions, draining its aggregate balance to a 2008-low. The HKMA last month said there would be “considerable uncertainties” on the US rate trajectory and called for vigilance on the US banking crisis.

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Global financial markets came under duress last month after three mid-size US lenders, including Silicon Valley Bank, failed. In Europe, UBS Group took over Credit Suisse in a government-brokered deal after the latter struggled to staunch an exodus of funds and clients amid a confidence crisis.

Last week, JPMorgan Chase and PNC Financial Services Group lodged bids to buy First Republic Bank, the Wall Street Journal reported, even after US authorities engineered a U$30 billion deposit injection into the San Francisco lender to shore up its liquidity.

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“This will increase the chances of recession,” Wong at Everbright Securities International said. “Therefore, the Fed needs to stop raising interest rates to observe the extent of the impact of credit tightening on the economy.”

Kelvin Mo, a senior analyst of Futu Securities, shares his view. Receding US inflation will help put an end to the rate-hike cycle and may allow the Fed to consider cutting rates towards the end of the year, he said.

Raymond Yeung, chief economist for Greater China at ANZ Group, is among the four analysts who have not called an imminent end to the Fed’s tightening cycle. The outlook is still largely dependent on future inflation readings, he said.

Desmond Tjiang, CIO for equities at BEA Union Investment. Photo: Handout

Desmond Tjiang is also cautious. The chief investment officer for equities at BEA Union Investment, which manages about US$7.3 billion of assets, said “we are close to the end of rate hikes”. Still, he expects the Fed to hold rates higher for longer before a change of direction.

Most of the 12 analysts surveyed by the Post said any rate cut will not arrive before the year-end, at the earliest.

“The market is expecting the US economy to weaken further around year-end or early 2024, so it is likely the Fed would need to see a real slowdown, including a jump in US jobless rate or negative growth to kick off a rate cut,” said Nixon Mak, the head of Hong Kong pensions and solutions strategy at Invesco.

Putting aside other non-economic and financial factors which may impact the Hong Kong property market, such as geopolitics and demographics, the city’s housing market may start to improve with the prospect of an easier policy when the Fed pauses or cuts rates, he added.

Post