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Hong Kong Monetary Authority (HKMA)

Hong Kong raises base rate fourth time in 13 months, gets a shrug from markets and borrowers

Hong Kong’s banks kept their prime rates unchanged, homes changed hands at record prices, and the stock market was little changed.

PUBLISHED : Thursday, 14 December, 2017, 8:51am
UPDATED : Tuesday, 03 July, 2018, 9:47pm

The Hong Kong Monetary Authority yesterday raised its base lending rate, a much-anticipated move in step with the US Federal Reserve that passed with little reaction from the city’s financial markets, as commercial banks kept their prime rates unchanged while the stock market closed little changed.

The city’s de facto central bank raised the base lending rate by 25 basis points to 1.75 per cent, following an equivalent overnight increase by the US Fed to maintain the Hong Kong dollar’s peg to the American currency.

Explainer: What Hong Kong’s interest rate increase means for Hibor, prime and mortgages

For the fifth time since December 2015, Hong Kong’s commercial banks kept their prime rates - the cost of lending money to their best customers - unchanged. HSBC, Bank of China (Hong Kong) and Hang Seng Bank all said they would maintain their prime rates unchanged at 5 per cent, while their interest rates on Hong Kong dollar deposits stayed at fractions of 1 per cent.

“The larger banks with ample liquidity may not rush to raise rates, while the small-to-medium banks, which suffer more from a higher cost of funds [due to the higher base rate], may also refrain from taking the first step amid fierce competition,” said Carrie Li, an economist at OCBC Wing Hang.

“Banks will face more pressure to lift their prime rate next year.”

Key rates are poised to rise in the first quarter, but what does this mean for Hong Kong borrowers?

To underscore how the markets are taking the most-telegraphed economic event on earth in stride, two newly built luxury homes sold yesterday at record prices at North Point, setting records for the eastern part of Hong Kong island.

One buyer paid HK$68.73 million for a 1,173 square feet flat on the 10th floor B at the Victoria Harbour apartment complex built by Sun Hung Kai Properties (SHKP), while another unit measuring 1,585 sq ft was sold for HK$89.8 million (US$11.5 million).

“The interest rate increase was expected,” said SHKP’s deputy managing director Victor Lui Ting. “We won’t see a fast and sharp increase over the next 12 months.”

And Hong Kong’s stock market was little changed, with the benchmark Hang Seng Index closing 0.19 per cent lower, after swing between a 0.5 per cent gain and a 0.6 per cent decline.

The US Fed has foreshadowed three additional rate increases in 2015, actions that Hong Kong must follow to maintain its dollar’s peg. The US central bank also pointed ahead to a strong economic recovery next year, which cheered investors, said Stefan Hofer, chief investment strategist Asia for private bank LGT.

“What was more significant than the rate increase was the fact that the Fed also revised its forecasts for economic growth higher, and by more than was expected, which suggests that the strong growth we are seeing in almost all major markets will continue,” he said.

Still, banks will have to eventually pass on the cost of funds to borrowers, which could eventually mean higher mortgage payments for borrowers in Hong Kong, already the world’s most expensive place to rent or own a home.

“As interest rates in Hong Kong normalise, I hope everyone will consider the risk when borrowing,” said Norman Chan Tak-lam, the monetary authority’s chief executive, at a press briefing yesterday.

With additional reporting by Josh Ye in Hong Kong.