Hong Kong’s major banks keep their prime rate steady after HKMA’s quarter-point increase

Hong Kong raised its base rate to 5.25 per cent after the US Fed voted unanimously to keep the fight to quell inflation as its top policy goal
Banking crises in the US and Europe have fanned uncertainties in global markets, affecting the decisions of central banks, analysts said

Banking & finance

Enoch Yiu

Published: 7:03am, 23 Mar 2023

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Hong Kong’s major banks chose to keep their prime rate unchanged after a quarter-point increase by the city’s monetary authority in lockstep with the US Federal Reserve, which voted unanimously to put anti-inflation at the forefront of its monetary policy.

HSBC was the first lender to announce at noon that it would keep its best lending rate unchanged at 5.625 per cent per annum, according to a statement by the largest of Hong Kong’s three currency-issuing banks. Its subsidiary Hang Seng Bank also said it would keep its prime rate at 5.625 per cent.

The other two note-issuing banks, Bank of China (Hong Kong) and Standard Chartered, kept their prime rates unchanged at 5.625 per cent and 5.875 per cent, respectively. Bank of East Asia also left its prime rate unchanged at 5.875 per cent.

“This reflects the rate rise cycle for commercial banks in Hong Kong may come to an end as the US Fed is also expected to end its rate rise cycle soon,” said Eric Tso Tak-ming, chief vice-president of local mortgage broker mReferral.

Earlier today, the Hong Kong Monetary Authority (HKMA) raised the city’s base rate to a 15-year high of 5.25 per cent, hours after the Fed raised its target rate by a quarter point to a range of 4.75 per cent to 5 per cent.

There will be “considerable uncertainties on the interest rate path in the US” the HKMA said in a statement as its chief executive Eddie Yue Wai-man is travelling and unable to speak at his usual press briefing. “Individual banks in the US had exhibited financial health and liquidity problems recently, which might result in credit tightening.”

The much-anticipated increase matched the hike in February, which was smaller than the Fed’s half-point move in December 2022 to rein in inflation printing near a four-decade high. Hong Kong has kept its monetary policy in lockstep with the Fed since 1983 to preserve the local currency’s peg to the US dollar.

Asia’s stock markets took the Fed’s latest move in stride, with key indexes rising in seven of 20 bourses. Hong Kong’s benchmark Hang Seng Index rose 2.3 per cent on Thursday, while gauges in Shenzhen and Shanghai advanced 1 per cent and 0.6 per cent, respectively.

There was a 68 per cent chance of a 25-basis-point hike, according to Fed funds futures compiled by the CME Group before the central bank’s meeting. The odds are almost evenly split on between a pause and another quarter-point hike in the next meeting in early May.

A rising rate cycle underscores the imperative of fighting inflation, and the confidence that the move would not deepen the banking crisis that is developing among America’s midsize lenders. Three midsize US banks including Silicon Valley Bank had collapsed over the past month, unleashing a market turmoil that spilled over to Europe, forcing Credit Suisse to be sold to UBS last weekend.

The US government and nearly a dozen of Wall Street’s largest banks including JPMorgan Chase last week funnelled US$30 billion as deposits into First Republic Bank in San Francisco to pre-empt a liquidity crisis and prevent it from going under.

A First Republic Bank branch in Millbrae, California on March 13, 2023. Photo: Xinhua.

“The Fed acknowledged the potential implications of banking turmoil on the economic outlook but highlighted that at this point, it is uncertain how big that impact will be,” said JPMorgan Asset Management’s Asia-Pacific Chief Market Strategist Tai Hui. “The Fed also acknowledged recent robust job gains and removed its language on inflation easing.”

The uncertainty reflects the Fed’s struggle to plot a course of action while balancing its mission to rein in inflation, while protecting financial stability.

“The [Big Picture] backdrop has become more complicated with the recent financial sector challenges,” said Invesco’s global market strategist of Asia-Pacific (ex-Japan) David Chao. The Fed’s “dovish rate hike this month makes sense, because on the one hand, core inflation remains strong and is expected to persist in the coming months, while on the other hand, the recent banking emergencies could weigh down on growth and inflation,” he said.

People queue up outside the headquarters of the Silicon Valley Bank (SVB) in Santa Clara, California on March 13, 2023. Photo: Xinhua.

HSBC typically is the first among Hong Kong’s commercial banks to adjust its rates in response to the city’s cost of capital. Most analysts contacted by the South China Morning Post said the prime rate would be kept unchanged at most lenders.

“If banks suspend raising their prime rate further, it will encourage more homebuyers to enter the property market,” mReferral’s Tso said. The reopening of the border between Hong Kong and the mainland will also bring more tourists, adding another source of buyers and have a positive impact on the property market for the rest of the year, he added.

“It is positive news for the property market and the overall economy when the major lenders in Hong Kong keep their prime rate unchanged,” said Raymond Yeung, ANZ’s Greater China chief economist. “The homebuyers who have their mortgage loans linked with the prime rate will benefit the most.”

Hong Kong’s banks raised their prime rates three times in 2022, by a total of 62.5 basis points. The best lending rate at HSBC, Bank of China (Hong Kong) and Hang Seng Bank now stands at 5.625 per cent per annum. Standard Chartered, Bank of East Asia and other lenders are pricing loans at 5.875 per cent.

The entrance to the office of the Hong Kong Monetary Authority at Two IFC in Hong Kong on January 27, 2014. Photo: Shutterstock.

Hong Kong’s Whampoa Gardens housing estate on 7 November 2018. Photo: Shutterstock

The HKMA weighed in to warn property buyers to watch out for rising rates, after 12,164 mortgage borrowers were driven into negative equity in December when their home value fell below their outstanding loans.

“The Hong Kong dollar interbank rates might remain at elevated levels for some time,” the HKMA said. “Therefore, the public should be prepared for the movements of banks’ lending rates, and should carefully assess and manage the relevant risks when making property purchases, taking out mortgages or making other borrowing decisions.”