Editorial | US rate rise promises even more pain on way for battered Hong Kong
- Decision is bad news for city, particularly residents with loans, mortgages and overdrafts, and will present its new leader with a challenging economic environment
With gross domestic product shrinking sharply by 4 per cent in the first quarter and the economy battling a slump, the last thing Hong Kong needs is a rise in interest rates that will hurt households and businesses. But it was unavoidable on Thursday after the United States Federal Reserve raised its benchmark rate by half a percentage point, prompting the Hong Kong Monetary Authority (HKMA) to follow suit under the local dollar peg to the US currency.
It was the biggest one-time rise since 2000. The news was expected, amid inflation exacerbated by the Ukraine war and the Covid-19 pandemic.
What sets this cycle of rate rises apart is the speed and extent. In the last phase, from 2014 to 2018, it took four years to raise rates to 2 per cent.
In the current cycle, the HKMA reached 1.25 per cent in just two months. By end of 2023 the Hong Kong base rate is expected to have risen to 4 per cent in two years.
This is another blow to an economy battered by more than two years of pandemic restrictions, on top of months of anti-government protests in 2019. It means yet more pain for residents.
In the last upcycle, commercial banks waited until the HKMA had raised the benchmark rate eight times by increments of 0.25 percentage points before they raised their prime rates and passed on the borrowing costs. They are unlikely to wait that long this time.