Banking & Finance

Hong Kong’s money rate soars to decade high before US Fed raises key interest rates

PUBLISHED : Monday, 24 September, 2018, 5:14pm
UPDATED : Monday, 24 September, 2018, 11:28pm

Hong Kong’s short-term money market rates soared to their highest in at least a decade on Monday, as the city’s Financial Secretary repeated a warning to homebuyers to expect higher mortgages when the local cost of funds rise in lockstep with US benchmarks later this week.

The Hong Kong interbank offered rate (Hibor), a gauge of short-term lending between banks, with a maturity of one day, jumped 176 basis points to 3.38 per cent, its highest level since 2007. Hibor with tenors of one week and one month, both rose to their highest levels since 2008, climbing 120 basis points to 2.87 per cent and 28 basis points to 2.17 per cent respectively.

Higher rates drove the city’s currency higher for a third day, with the Hong Kong dollar changing hands at 7.8091 per US dollar after its biggest intra-day increase in 15 years last Friday, because of expectations of higher interest rates in the city.

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Traders that were previously conducting arbitrage trades in the currency market by selling the low-yielding Hong Kong dollars for higher yielding US dollars were now scrambling to unwind such positions.

Commercial banks have so far left their prime rates unchanged since 2008 even as the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, has been raising its base lending in lock step with the Fed to maintain the Hong Kong dollar peg with the US dollar.

HKMA chief executive Norman Chan Tak-lam however said that Hong Kong banks were expected to consider raising interest rates if the cost of capital increases following widely expected anticipated US rate rise this week, local media reported on Friday.

Showing that it was getting harder and costlier to obtain funds, a slew of commercial banks last week raised their fixed deposit rates, continuing a trend which started a few months ago.

“Tighter liquidity conditions is triggering expectations for higher prime rates, which is in turn pushing up Hibor further,” said Westpac Asia head of macro strategy Frances Cheung.

The squeeze in liquidity seems to be especially pronounced with the approach of the quarter end, and also because of strong funding demand for the public holiday Tuesday, and for next week’s national day, said Eddie Cheung, Asia currency strategist at Standard Chartered Bank.

Carie Li, a Hong Kong-based economist with OCBC Wing Hang Bank, pointed out that Chinese hotpot chain Haidilao has frozen HK$3 billion (US$384.09 million) of capital for its initial public offering, which will be released later this week, and thereby keeping Hibor rates elevated.

Any increase in commercial banks’ prime rate would bring soaring real estate prices in Hong Kong closer to a tipping point, given the highly leveraged nature of the city’s property market.

The signs of a property market slow down are here. Shu Qi, one of the highest paid actresses in China, sold her Tai Po villa at a HK$2 million loss on Sunday, agents said, amid expectations that home prices would fall over the next 12 months.

Explainer: What Hong Kong’s interest rate increase means for Hibor, prime and mortgages

Higher interest rates could hurt families with big mortgage obligations, the Financial Secretary Paul Chan Mo-po said in a blog last month, repeating a warning that he has made several times.

Existing borrowers, who have a total of HK$1.26 trillion in outstanding mortgage loans, may soon face similar pressure as banks are expected to increase their best lending rate, or prime rate, as early as the end of this month – the first rise in 12 years.