Hong Kong banks stand pat as HKMA tightens interest rates in line with the Fed

Hong Kong savers left wanting after local banks hold interest rates on savings accounts unchanged

PUBLISHED : Thursday, 15 June, 2017, 7:33pm
UPDATED : Friday, 16 June, 2017, 12:12am

Hong Kong banks kept their interest rates unchanged on Thursday, disappointing savers who had been hoping that local institutions would break from the near-zero rates on offer after the Hong Kong Monetary Authority unveiled its third increase in the base rate in seven months.

HSBC kept its interest rate for Hong Kong dollar savings accounts unchanged at 0.001 per cent, while the Bank of China Hong Kong and Hang Seng Bank maintained their rates at 0.01 per cent.

The HKMA, Hong Kong’s de facto central bank, increased the base rate by 0.25 percentage point to 1.5 per cent on Thursday morning, tracking the overnight move by the US Federal Reserve.

However, Hong Kong banks did not adjust the rates they offered to either savers or borrowers.

Market watchers said they did not expect local banks to make any change to the interest rate regime this year, owing to excess capital held on deposit.

When it comes to borrowing, HSBC, Hang Seng and Bank of China Hong Kong kept their prime rates at 5 per cent, while Standard Chartered and Bank of East Asia held their rates steady at 5.25 per cent.

HSBC said it had not changed its prime lending rate since November 2008, when the base rates in the US and Hong Kong had fallen to record lows.

As the Hong Kong dollar is pegged to the US dollar, the HKMA is obliged to follow US monetary policy. However, local banks are under no obligation to adjust their own interest rates accordingly.

Even though the Fed has lifted interest rates four times since the tightening cycle began in December 2015, not a single bank in Hong Kong has lifted their interest rates.

HKMA raises rates after US Fed move, reiterates warning to home buyers

Nor are they likely to do so in the immediate future, according to market watchers.

“Interest rates will not be lifted in Hong Kong this year,” said Chordio Chan Siu-ping, head of investment at Bank of China (Hong Kong).

“As there is more than HK$200 billion (US$25.64 billion) of capital available in Hong Kong there is no reason why interest rates should go up. Unless capital outflows reach about HK$100 billion, the market is not likely to panic.”

Meanwhile, fierce competition between banks for borrowers means they are not likely to raise interest rates they charge on loans for the time being.

At present, Hong Kong’s aggregate balance, a measure of the amount of money in the system stands at just under HK$260 billion, according to Thomson Reuters data.

However, as real interset rates remain flat in Hong Kong but rise in the US, funds are likely to begin flowing out of the city in search of higher-yielding US assets.

“If the interest rate differentials widen further there will be more outflows as people will switch from holding Hong Kong dollars to US dollars,” HKMA chief executive Norman Chan Tak-lam said on Thursday as he announced the base rate hike.

“When these outflows quicken, it will lead to tighter liquidity in the banking system.”

Chan also cautioned there were additional factors affecting the interest rates offered by banks.

“The cost of capital and funding also affect banks’ decisions to set their mortgage rates, and a number of Hong Kong banks chose to raise their mortgage rates recently in advance of the Federal Reserve’s decision,” he said.

These included HSBC, Bank of China (Hong Kong) and Standard Chartered.

Hong Kong’s banks raise mortgage rates, after HKMA tightened risk rules

Some analysts also attributed the rise to measures taken by the HKMA to cool the property market. .

The HKMA has long warned of the risks to home owners of the approaching rate-tightening cycle, a theme revisited by Chan on Thursday.

“I would urge everyone to be vigilant and manage their risks carefully,” he said.

Market watchers say the Fed is likely to raise interest rates once more this year, most likely in November or December, followed by an additional two or three rate tightening moves in 2018 and 2019.