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Hong Kong Monetary Authority (HKMA)

HKMA raises rates after US Fed move, reiterates warning to home buyers

Base rate rises by 0.25 percentage points, tracking Fed move

PUBLISHED : Thursday, 15 June, 2017, 9:27am
UPDATED : Friday, 26 January, 2018, 4:14pm

The Hong Kong Monetary Authority raised its base rate by 0.25 percentage points on Thursday morning, following the US Federal Reserve’s overnight move.

In announcing the decision, HKMA chief executive Norman Chan Tak-lam reiterated his warning to Hong Kong home buyers that mortgage rates will rise in the near future. The city’s average home prices have soared for many consecutive months to a record, making Hong Kong the world’s most expensive major urban centre.

Still, deep-pocketed buyers had been packing property sales to snap up new apartments, with some buyers purchasing multiple units. The exuberance is raising concerns among policymakers that a sudden downturn in the property market may leave banks and borrowers alike struggling.

“This is the Fed’s third increase in seven months, and is a sign that the pace of rate normalisation is gathering momentum,” Chan said. “As interest rates rise, I would urge everyone to be vigilant and manage their risks carefully.”

Hong Kong’s base rate now stands at 1.5 per cent. The HKMA, Hong Kong’s de facto central bank, is obliged to follow US interest rates as Hong Kong’s currency is pegged to the US dollar.

On Wednesday afternoon US time, Fed chair Janet Yellen matched market expectations by increasing the US federal funds rate by 25 basis points to between 1.00 and 1.25 per cent.

Federal Reserve, as expected, raises US interest rates by 25 bp

Hong Kong’s commercial banks will announce in due course whether they will raise the rates they offer to savers or borrowers.

As of now, none of the city’s major lenders have made the first move in raising the prime lending rate, ever since the base rate started rising in December 2015, as they have readily available funds, while competitive pressure compel them to maintain low mortgage rates to borrowers.

The last time banks in Hong Kong adjusted their interest rates was during the 2008 global financial crisis. These were cuts at a time of financial strife, when the Fed slashed rates to record lows to stimulate an economy in the worst depression in decades.

“At the moment, there is abundant liquidity in Hong Kong’s banking system, but as the interest rate differential widens between the Hong Kong dollar and the US dollar ,we expect capital outflows to increase,” Chan said.

Capital outflows would lead to tighter liquidity, and this would put pressure on banks to raise interest rates.

However, Chan said that systemic liquidity was not the only factor affecting mortgage rates.

“The cost of capital and funding also affects banks’ decisions to set their mortgage rates, and a number of Hong Kong banks chose to raise their mortgage rates last week in advance of the Federal Reserve’s decision,” he said.

Hong Kong’s banks raise mortgage rates, after HKMA tightened risk rules

HSBC, Bank of China (Hong Kong), Standard Chartered, Bank of East Asia, Hang Seng Bank and OCBC Wing Hang Bank all announced increases in their mortgage rates at the end of May.

However, analysts attributed this rise to tightening measures by the HKMA to control the property market rather than changes in underlying macro economic conditions.

The Fed also released a projection of future rate rises which indicates one further increase this year.

“Low inflationary pressure means the Fed is not forced into hiking rates aggressively, and we only expect to see higher rates if justified by supportive economic releases, with particular focus on the evolution of inflation,” UBS Wealth Management’s global chief investment officer Mark Haefele said in a note.