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Hong Kong Monetary Authority (HKMA)

Bankers see HK$100 billion as the cue for Hong Kong rate hikes. HKMA says no

Concerns are growing that rates will rise should the aggregate balance dip below HK$100b. The balance, or liquidity level in the banking system, has dropped since the HKMA intervened in the forex market to defend the local currency

PUBLISHED : Thursday, 24 May, 2018, 8:25pm
UPDATED : Thursday, 24 May, 2018, 11:05pm

The Hong Kong Monetary Authority has down played mounting concerns among some bankers that the city will raise its best lending rate for the first time in 12 years if the aggregate balance drops below the “magic number” of HK$100 billion (US$12.74 billion).

HKMA deputy chief executive Howard Lee has dismissed the HK$100 billion as the “magic number” or threshold linked to the lending rate rise, a move that could add to borrowers’ cost for home mortgages.

Lee’s remarks in an article on Thursday came after the city’s de facto central bank spent HK$70.35 billion of its US$440 billion in foreign reserves in the past five weeks to defend the peg which keeps the Hong Kong dollar trading within a HK$7.75 to HK$7.85 range for every one US dollar.

The US has increased interest rates six times but Hong Kong commercial banks have yet to adjust their small depositors interest rate or the best lending rate.

The gap in the cost of money between the US and Hong Kong has led to the capital outflows, triggering the spate of HKMA interventions. The moves have reduced the aggregate balance, the liquidity level in the system, by 40 per cent since April to HK$109 billion, which in turn prompted many bankers to speculate a best lending rate rise since March 2006 should the balance dip below HK$100 billion.   

Lee stressed that the aggregate balance was unlike the stock market, where investors attached psychological barriers to. “Nor are interest rates directly correlated with the aggregate balance,” he wrote in the article posted on the HKMA website.

“While there are a few theories out there suggesting local interest rates will go up when the aggregate balance falls to a specific level, the fact is that there is no such ‘magic number,” Lee said, adding that banks do not raise rates based on the level of the aggregate balance.

“We are not concerned about the size of the aggregate balance, as the market itself will always find an equilibrium,” he said.

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Still, bankers and brokers maintained that borrowers should look at the HK$100 billion mark as the threshold.

“Before the financial crisis in 2008, the aggregate balance stood at around the level of HK$80 billion to HK$90 billion. If the aggregate balance would soon drop below HK$100 billion, it would return the liquidity level to what it was a decade ago. This would be the time for the banks to change their best lending rate,” said Jasper Lo, the chief investment strategist at Eddid Securities and Futures.

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Most banks in Hong Kong have kept their best lending rate at 5 per cent or 5.25 per cent.   

“Many banks have started offering large depositors higher interest rate this month. It wouldn’t be long before we would see small deposit and lending rates rise,” Lo said.