Hong Kong braces for capital outflow after 75-basis point base rate increase in lockstep with US Fed
- Hong Kong’s financial secretary and de facto central banker both said the city’s banking system has enough liquidity even if they brace for capital outflows
- The city’s commercial banks are keeping their prime rates unchanged for now, with HSBC, Standard Chartered and Bank of China (HK) holding their rates steady
“More capital outflow from the Hong Kong dollar market is expected, while the Hong Kong interest rate will gradually catch up with those in the US,” the HKMA’s chief executive Eddie Yue Wai-man said during a Thursday media briefing after matching the Fed’s move. The Fed hike was higher than officials conveyed at the previous meeting, but is “still consistent with recent market expectations,” he added.
Global stock markets took the 75-point blow in their stride, with benchmark indexes gaining in eight of 10 major Asian markets, following the 1 per cent rise overnight in the Dow Jones index after the Fed’s much-telegraphed move. Major Wall Street banks raised their expectations this week from the previous 50-point increase.
“The [US] inflation data was so high that it shocked the market,” said Raymond Yeung, chief economist for the Greater China region at ANZ Banking Group. “The trend will continue as the US is set to continue to increase interest rates over the next few months.”
During the last interest rate cycle, Hong Kong’s banks waited for eight consecutive rounds of 25-basis point increases before raising their prime rates. Still, the current increases by the central banks are faster, and bigger, heralding risks ahead.
Hong Kong’s banks have been stress-tested to ensure that mortgage borrowers can service their loans even if the interest rate rises by up to 3 percentage points, Yue said. Higher interest rates are unlikely to lead to negative equity, as property prices remain stable, he said.
The same cannot be said for new borrowers. “Those who plan to apply for a 30-year mortgage loan need to carefully assess if they can afford to repay in a higher interest rate environment,” said Yue.
The 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 rules and closed businesses caused the city’s economy to shrink by 4 per cent in the first quarter.
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 control inflation.
“The US and Hong Kong interest rate rises are expected to add more volatility to stock markets worldwide,” said mReferral Corporation’s chief vice-president Eric Tso Tak-ming. “It also means that Hong Kong mortgage borrowers who priced their home loans to Hibor will have to pay more immediately.”
Consumers whose mortgages and other loans are based on Hong Kong’s interbank offer rates (Hibor) are already starting to feel the pain.
One-month Hibor rose to 0.58 per cent on Thursday, versus 0.14 per cent at the start of the year. A customer with a HK$5 million loan with a 30-year tenor pegged to the one-month Hibor will now have to pay HK$976 more each month versus six months ago.
Long-term funding costs rose even more, with three-month Hibor jumping to a fresh two-year high of 1.17 per cent on Thursday, from 0.25 per cent at the start of 2022. The 12-month Hibor also reached a three-year high of 2.92 per cent, compared with 0.43 per cent in January.
Still, property buyers will only be deterred when the one-month Hibor climbs above 2 per cent, said Tommy Ong, managing director of T.O. & Associates Consultancy. That threshold may be breached by year end, he added.
He said as the Hong Kong market’s valuation remains low, capital outflows and HKMA’s intervention in the currency market will not have a big negative impact on the local stock market.