(Bloomberg) -- The Hong Kong Monetary Authority raised its benchmark interest rate in line with the US Federal Reserve on Thursday in a move that’s likely to have little immediate impact on the real cost of borrowing, which has almost halved in the past two months.
The HKMA increased the base rate by 25 basis points to 5% on Thursday after the Fed boosted its rate by the same magnitude, the city’s de-facto central bank said in a statement. Hong Kong’s rate moves in lockstep with the Fed’s due to the local currency’s peg to the greenback.
Plentiful liquidity and still weak demand for loans means banks aren’t under pressure to follow suit. The one-month Hong Kong Interbank Offered Rate, known as Hibor, has fallen to 2.66% from a 15-year high of 5.08% in early December. Hibor represents a daily average of what banks say they would charge to lend each other.
Banks raised their best lending rates three times last year as Hibor spiked higher, putting the city’s economy under additional strain. HSBC Holdings Plc said Thursday that it would not change its rate this time — a decision that will be good news for businesses and homeowners struggling with a contracting economy and tumbling property prices.
The city’s gross domestic product shrank 3.5% last year, its third contraction in four years, as slowing global demand, rising interest rates and a prolonged exit from isolating Covid curbs weighed heavily on the financial hub. Home prices plunged about 16% in 2022, according to Centaline Property Agency.
Money has been flowing back into Hong Kong as investors bet on a recovery in China after the nation’s pivot away from Covid Zero. The benchmark Hang Seng Index has surged about 50% since the end of October, with $1.6 trillion added to the value of the local stock market.
The decline in borrowing costs is likely to be shortlived, however. Falling Hibor has widened the gap with its US counterpart Libor, making it attractive for traders to borrow in Hong Kong dollars to buy US dollars to earn the higher yield. That so-called carry trade can push the local currency toward its weak end of HK$7.85, prompting the HKMA to intervene — which reduces liquidity and drives rates higher. The Hong Kong dollar last traded at HK$7.481, near its weakest level since mid-November.
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“The rate hike cycle in the US has not yet been completed,” Eddie Yue, chief executive of the HKMA, said at a press briefing Thursday morning. “The public should be prepared for the likelihood that banks lending rates may go further higher. They should carefully assess and manage the relevant risk, especially interest-rate risk.”
Hong Kong’s mortgage rates could stay higher than housing rental yields for a lengthy period, limiting room for a recovery in home prices despite a potential rental rebound, Bloomberg Intelligence analysts including Patrick Wong wrote. Rents may rise by about 5% this year as leasing demand grows and elevated mortgage costs deter potential homebuyers, they wrote.
--With assistance from Richard Frost.
(Adds update from HSBC, which did not change its best lending rate, along with background about Hong Kong liquidity.)
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