Federal Reserve

Hong Kong raises base rate by 25 basis points to 1 pc, matching move by US Fed as further increases eyed in 2017

PUBLISHED : Thursday, 15 December, 2016, 7:48am
UPDATED : Tuesday, 03 July, 2018, 9:47pm

The Hong Kong Monetary Authority raised the base rate for the first time in a year, following a widely anticipated move by the US Federal Reserve to end almost a decade of cheap capital.

The city’s de facto central bank raised the base rate by 25 basis points to 1 per cent, following an overnight move of the same magnitude by the US Fed.

Watch: US Fed increases interest rate by 25 basis points

Norman Chan Tak-lam, chief executive of the HKMA, warns on more rate rises next year and a capital outflow from Hong Kong.

“With the US interest rates now rising, it’s expected that some of the estimated US$130 billion of capital inflow into Hong Kong since 2008 will be exchanged back to the US dollar,” Chan said during a press conference in Hong Kong this morning after the authority increase the interest the first time in a year and the second time in a decade.

“A capital outflow from Hong Kong is expected, and the Hong Kong dollar may trade at the weaker end of the peg at HK$7.85 per US dollar.”

He said the investment markets would have uncertainty amid these capital outflow while investors need to pay attention to the risks ahead.

“When the Fed has said the future interest rate rise would be in a gradual process, the pace may in fact be faster than expected due to three factors. The US labour market improved recently may led to a rise of wages; the oil and resources price up would led inflation up; and the US new president plans to cut the tax rate and add infrastructure to stimulate consumption. All these factors would add inflation pressure and may result in the US Fed to increase the interest rate rise at a speed faster than expected,” he said.

He said in Hong Kong, the one month interbank interest rate Hibor has shot up to eight-year highest at 0.6 per cent this week, up from 0.24 per cent in September.

While higher rates add pressure on mortgage borrowers and the business sector, a normalisation in the interest rate will benefit Hong Kong’s economic structure, Chan said.

“Interest rate is only one factor that affects the property market,” he said. “There are other reasons for people to decide when to buy or sell their properties.”

More interest rate increases by the Fed are expected in 2017, which will affect Hong Kong’s equity market and property developers, and are likely to bolster the local currency in relation to the yuan.

Watch: How the Fed rate hike impacts Asian markets

US Fed increases interest rate by 25 basis points as era of cheap money ends

The Hong Kong Monetary Authority is compelled to follow the US Fed action in raising the cost of funds in the city because of the Hong Kong dollar’s peg to the US currency, in place since 1983.

Commercial banks in the city have the flexibility to choose if they want to immediately match the increase.

The US central bank raised its benchmark rate by 25 basis points overnight, raising the target rate of funds to between 0.5 per cent to 0.75 per cent.

The US Fed and Hong Kong last increased the base rate in December 2015 after keeping the cost of funds at close to zero for more than a decade, flooding the world with cheap capital and inflated asset values across the board.

HKMA estimated about US$130 billion of capital inflows to the city during the past few years before the interest rate rise last December. Chan has repeatedly warned investors during the past year that they should prepare themselves for shocks in the stock and property markets as the Fed move ended the era of easy money.

Analysts and bankers expect the US Fed to raise rates by between two to as many as five times in 2017.

“This will support a strong US dollar and yuan would be weakened along with Japanese yen, and euro,” said Hang Seng Bank’s executive director Andrew Fung, who expects three to four rate increases next year. “I do not see pressure on Hong Kong dollar to the US dollar until the US Fed rate rises to 1.75 to 2 per cent.”