Hong Kong’s base rate rises by the most in 22 years, ushering in era of faster, bigger increases in borrowing costs even as economy slumps

The city’s base rate rose to 1.25 per cent after the 50-basis point increase, en route to the 4 per cent expected by the end of 2023
Hang Seng Index fell 0.4 per cent after rising by as much as 2 per cent, taking its cue from the 3 per cent overnight gain in the S&P500

HKMA

Enoch Yiu

Published: 7:25am, 5 May 2022

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Hong Kong’s cost of money soared by the most in 22 years as the city’s de facto central bank followed the US Federal Reserve to usher in an era of faster, bigger rate increases, even while the local economy is reeling from a slump.

The city’s base lending rate rose by 50 basis points to 1.25 per cent, after the Fed raised its rate by half a point, according to a statement by the Hong Kong Monetary Authority (HKMA). That marked the biggest one-time increase in Fed rates since 2000.

“The interest rate adjustment will come at a much faster pace than the last cycle,” HKMA’s chief executive Eddie Yue Wai-man said in a media briefing after announcing the monetary policy, warning borrowers to “carefully assess and manage the relevant risks” in borrowing.

The Fed has signalled 10 increments in US interest rates, raising the Fed rate from zero to 2.6 per cent by the end of this year, and to 3.75 per cent by the end of 2023, economists said. That’s a faster pace than the previous cycle, when the Fed rate rose 2.25 percentage points in the four years from 2015 to 2018.

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“This is just the beginning of the [rising] interest rate cycle,” said Raymond Yeung, chief economist for the Greater China region at ANZ, the Australian bank. “Many mortgage and loan borrowers have never seen such high rates.”

Hong Kong’s biggest banks are holding their prime rates unchanged for now, with HSBC, Bank of China (Hong Kong) and Hang Seng Bank keeping it at 5 per cent, while Standard Chartered and Bank of East Asia held their rate steady at 5.25 per cent, according to their statements after the HKMA’s move.

“For members of the public, the rise in interbank rates will increase their mortgage repayment expenses,” said Financial Secretary Paul Chan Mo-po, in response to media questions. He also noted that with the economy not yet fully recovered and with a relatively high unemployment rate, the higher interest rates could add more financial pressure for some property owners.

In the previous cycle, the city’s banks waited through nine consecutive increments of 25 basis points each by the HKMA before raising their prime rate by 0.125 percentage point in 2018, passing some of the higher borrowing costs to customers for the first time in a decade.

Explainer: What rate increase means for Hibor, prime and mortgages

The rising base rate spills over to the interbank offer rate (Hibor), with the 12-month Hibor jumping by 17 basis points to 2.33 per cent on Thursday morning on the heels of the HKMA’s move, compared with 0.43 per cent in January.

Most Hong Kong mortgage loans are tied to the Hibor, translating to higher monthly payments for borrowers.

A HK$5 million loan for 30 years will have to pay HK$976 more every month if the one-month Hibor rises to 0.6 per cent from the current 0.2 per cent, said mReferral Corporation’s chief vice-president Eric Tso Tak-ming.

On the higher end of the scale, one-month Hibor at 0.8 per cent translates to HK$1,984 in additional monthly payments on the same loan, while a 1.2 per cent rate means HK2,500 in increased payments, he said.

Hong Kong’s monetary policy has been run in lockstep with the Fed ever since the local currency was pegged to the dollar in 1983. The city’s base rate will rise to about 4 per cent by the end of 2023, according to the 10-step policy that takes the Fed rate to a 15-year high of 3.75 per cent to tamp down on rising inflation in the US economy, ANZ said.

“If the [base] rate goes up to 4 per cent or more, property sales will slow down, especially since the economy is weak,” Tso said.

Buyers of the Monaco Marine apartments in Kai Tak at Wheelock Properties’ sales office in Tsim Sha Tsui on 28 April 2022. Photo: K. Y. Cheng

Rising cost of capital comes at a bad time for Hong Kong, as the local economy has been ravaged by a resurgent Covid-19 pandemic that is only beginning to ebb. Months of social distancing and closed businesses have caused the city’s economy to shrink by 4 per cent in the first quarter, worse than the 1.3 per cent contraction expected by economists.

“Hong Kong’s economy is just beginning to recover from the pandemic, so any quick upwards move in interest rate is not favourable,” said Tommy Ong, DBS Bank’s managing director of Greater China wealth management solutions, treasury and markets.

The US economy has not seen a 50-basis point rate jump since 2000 when Alan Greenspan was Fed chairman, and his “irrational exuberance” became the catchphrase that defined the easy money and mood of the Dotcom era.

The Fed raised its key rate from a target range between 0.25 and 0.5 per cent, to between 0.75 per cent and 1 per cent.

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Global stock markets reacted with relief after the much-expected increases were announced, as the Fed veered away from its more hawkish stance, saying that a larger 75-basis point increase was not “being actively considered.”

Hong Kong’s benchmark Hang Seng Index fell 0.4 per cent after rising by as much as 2 per cent in early trading, taking its cue from a 3-per cent surge overnight in the S&P500 index after the Fed pulled its punches.

The stock market has factored in rising interest rates and is unlikely to make major swings, as the Fed’s move has been foreshadowed and analysed exhaustively, said Louis Tse Ming-kwong, managing director of Wealthy Securities.

“How mainland China copes with the rising Covid-19 outbreaks [in Shanghai and Beijing] would have a bigger impact on the Hong Kong stock market than the expected interest rate rises,” Tse said.

Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA) at his office at the IFC in Central on 9 March 2021. Photo: Winson Wong

Hong Kong’s finance officials have repeatedly warned the city’s borrowers about the risks of higher interest rates, with the HKMA’s Yue saying on May 3 in the city’;s legislature that the Hong Kong dollar is weakening as capital flows out of the city to chase after high-yielding US rates.

“HKMA is prepared to intervene in the market to support the Hong Kong dollar,” Yue said. “There is no need to worry as the Hong Kong banking sector is still full of liquidity.”

“The HKMA intervention will effectively drain liquidity from the market, which will result in the interbank interest rates going up,” said DBS’ Ong.