Federal Reserve

HKMA nudges base lending rate 0.25pc higher, tracking US Fed move

HKMA Chief Executive Norman Chan Tak-Lam says interest rate ‘normalisation’ to have impact on asset markets

PUBLISHED : Thursday, 16 March, 2017, 6:48pm
UPDATED : Thursday, 16 March, 2017, 11:27pm

US Federal Reserve Chairwoman Janet Yellen made good with her much-telegraphed interest rate increase, lifting the base lending rate by a quarter point overnight on Wednesday, citing confidence in the direction of the US economy.

The move was met with a similar increase by the Hong Kong Monetary Authority on Thursday, increasing Hong Kong’s base rate by 25 basis points to 1.25 per cent to maintain the stability of the Hong Kong dollar peg to the US currency.

The Chinese central bank also raised one of its medium term lending rates, which analysts linked to the US Fed’s decision.

“The outcome of today’s FOMC meeting was close to expectations, with the expected 25 basis point hike delivered [and] economic and interest rate forecasts little changed,” said Michael Feroli, chief US economist at JP Morgan, referring to the Federal Open Market Committee, the body responsible for setting the Fed’s base rate.

Asian equity markets rose after the policy moves, with key indexes rising across 14 markets in the region.

US interest rate normalisation will definitely impact on fund flows and asset markets around the world including Hong Kong
HKMA chief executive, Norman Chan Tak-lam

“US interest rate normalisation will definitely impact on fund flows and asset markets around the world including Hong Kong,” HKMA chief executive, Norman Chan Tak-lam told the media Thursday morning.

Chan said that as rates normalised, international capital would start to leave Hong Kong. He described this as “a fact of life” and added that since 2008, approximately US$130 billion had flown into Hong Kong.

Under the peg arrangement, the Hong Kong dollar can fluctuate between 7.75 to 7.85 per US dollar.

Chan said that the outflow of funds would mean that the exchange rate would soon hit the 7.85 outer band to the US dollar.

“When this happens one should not overreact as this is a natural and inevitable process leading to the normalisation of Hong Kong dollar interest rates,” he said.

On Thursday the People’s Bank of China raised rates on its medium term lending facilities by 10 basis points. Analysts at CICC said that one reason for the rate rise was to avoid a widening of the gap between US and Chinese interest rates

Hong Kong’s banks chose not adjust the interest rates that they provide to savers or borrowers despite the change in the base rate.

HSBC, Bank of China Hong Kong and Hang Seng Bank maintained their best lending rate at 5 per cent. Standard Chartered held their best lending rate at 5.25 per cent.

“Borrowers with mortgages linked to the banks’ prime lending rate will not see a change in their payments,” said Dennis Ma, head of research at property consultancy JLL.

“New mortgages linked to the Hong Kong Interbank Offered Rate [Hibor] will not become more expensive as fierce competition between banks means that they will reduce the amount they charge above the benchmark rate. Borrowers with existing mortgages linked to Hibor will see payments rise slightly,” Ma said, referring to the rate at which banks in Hong Kong lend money to each other.

One month Hibor stood at 0.46 per cent on Thursday, up from last September’s 0.24 per cent, but still low by historical standards.

Because of the large amount of international money stored in Hong Kong, banks can lend cheaply to each other, but as this capital leaves Hong Kong, Hibor is expected to rise.