People wearing face masks walk past a bank’s electronic board showing the Hong Kong share index in Hong Kong on Tuesday. Photo: AP
by SCMP Editorial
by SCMP Editorial

Hongkongers should think twice about loans as rise in interest rates looms

  • With the US Fed expected to raise its rate for the third time since April, it can only be hoped Hong Kong borrowers have heeded the warnings of top financial officials

For well over a year, Hong Kong’s top finance officials have warned borrowers to be mindful of how much they can afford to repay, especially for a long-term commitment such as a home mortgage.

Their advice seems not that far off being vindicated by an interest rate rise, despite a low local inflation rate. It is an example of how monetary policy in the city is divorced from local economic reality.

Hong Kong’s economy reflects what happens with the mainland. The coronavirus pandemic has basically sent consumption and retail sales into a slump. Inflation is therefore not an issue.

But official interest rates move in lockstep with the open market rate fixed by the United States Federal Reserve to maintain the local dollar peg to the US dollar.

The Fed is expected this week to raise its rate for the third time since April. This is after a flood of liquidity led to surging inflation in the rest of world and a rash of interest rate rises.

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The European Central Bank is the latest to follow suit. The 50 basis point rise in its benchmark rate – the first for 11 years – came as the Reserve Bank of Australia announced a 100 basis point rise.

Analysts expect the Fed to announce a 75 basis point rise, a total increase of 2 percentage points in three months.

It is anticipated that Hong Kong’s commercial banks would soon follow. So far they have resisted because there has been enough money in the financial system to sustain low rates, but every time the Hong Kong Monetary Authority – the city’s de facto central bank – steps in to defend the Hong Kong dollar against an outflow of capital seeking higher returns elsewhere, it drains money from the system.

Market expectations are that by the end of August, or September, real interest rates at local commercial banks will rise.


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China is now the last major economy maintaining a loose monetary stance rather than raising rates. It can be expected to continue doing so to support economic recovery.

Its central bank will, understandably, keep a close eye on the US Fed’s attempt to strike a balance between controlling inflation and stabilising the economy.

And the rest of the world will pay close attention to Beijing’s monetary policies, given concerns about the pressure on global energy and food prices from the Ukraine war.

Meanwhile, Hongkongers must resist being lured into a false sense of security by low inflation and, for the time being, low interest rates when they take out loans. They should pay heed to top finance officials urging prudence.

Financial Secretary Paul Chan Mo-po, for example, has used his blog or media appearances as a platform to remind residents to exercise caution. In other words, they should assess what they can afford in the long haul because rates will rise.