Hong Kong raises base rate by 75 basis points to 14-year high as Fed signals more pain and pledges to ‘keep at it’ to contain inflation
- The Hong Kong Monetary Authority raised its base rate to 3.5 per cent effective immediately, the highest level since March 2008
- All eyes are on Hong Kong’s other commercial lenders, after HSBC decided to lift its prime rate by 12.5 basis points, with effect from Friday
The Fed’s hawkish language weighed on global stock markets, driving the S&P 500 index in New York down by 1.7 per cent. Yields on the two-year Treasury note topped 4 per cent, the highest since 2007.
Hong Kong’s currency weakened to 7.8500 against the US dollar, compelling the HKMA to intervene in the market to prevent it from breaking the trading band.
“The Fed did not opt for [the full point increase] to avoid giving the impression that inflation is out of control, which would dampen sentiments and increase the market’s volatility,” said Everbright Securities International’s global market and forex strategist Kirk Wong. The inflation data has entered the so-called “platform period without setting new highs since June, reducing the pressure on any sharp hikes in rates,” he added.
More banks could follow in the footsteps of HSBC given the rate pressure, said T.O. & Associates Consultancy’s managing director Tommy Ong. Hong Kong’s three-month interbank offered rate (Hibor) rose to 3.16 per cent, while the 12-month rate increased to a 14-year high of 4.13 per cent. Both Hibor rates are the highest since late 2008 and are more than 10 times of the levels at the beginning of 2022.
“The rise in prime rates will mainly affect the property market,” Ong said. “With effective mortgage rate of 3 per cent and rental yield of 2.4 per cent, the demand for investment property may decline further.”
This has forced the HKMA to intervene in the market 31 times this year, buying a total of HK$213.96 billion of the local currency and selling US$27.26 billion of the US dollar, HKMA data showed. The authority bought HK$103.48 billion in 2018 and HK$22.13 billion in 2019 to bring the local currency within its trading band of between 7.7500 and 7.8500 per dollar.
“We do not see massive capital outflow from Hong Kong, as total [bank] deposits rose 0.4 per cent in the first half,” Yue said.
Hong Kong’s rate increase came at an inopportune moment for the local economy, which shrank by 1.4 per cent in the second quarter and 3.9 per cent in the preceding three months.
“Since the economic contraction was significant in the first half, it is highly likely that negative growth will be recorded for the full year,” Financial Secretary Paul Chan Mo-po said after the HKMA’s move, adding that the government will update its full-year economic forecast in November.
More than two years of Covid-19 curbs and quarantine rules had upended businesses, deterred visitors and drove almost all mass events into the ground, raising concerns about the city’s role as an international financial centre.
Travellers have avoided the city as Hong Kong still requires visitors to go through three days of hotel quarantine and four days of medical surveillance, even as most major cities around the world are living with Covid-19 and have removed most social-distancing and isolation controls.