As the city's de facto central bank raised interest rates in tandem with the Federal Reserve, for the first time this year, Hong Kong’s currency has surged beyond the midpoint of its trading band against the US dollar. After the Fed raised rates to a 22-year high and left the door open for more policy …
As the city’s de facto central bank raised interest rates in tandem with the Federal Reserve, for the first time this year, Hong Kong’s currency has surged beyond the midpoint of its trading band against the US dollar.
After the Fed raised rates to a 22-year high and left the door open for more policy tightening, the Hong Kong Dollar strongly crossed the center of the pair’s permissible trading zone, which is 7.80 per dollar. Within hours, the Hong Kong Monetary Authority raised the local funding standard by 0.25% to 5.75%.
Following the HKMA’s rate hike, the city’s largest lender, HSBC Holdings Plc, announced a 12.5 basis point rise in its prime rate to 5.875%. As of this year, local banks have raised lending rates as the monetary tightening cycle affects liquidity and raises their funding costs. Given the local currency’s tie to the US dollar, interest rates in Hong Kong fluctuate in lockstep with those in the U.S. Higher funding costs will assist the HKMA in containing negative wagers on the city’s currency and maintaining its peg, albeit a sustained rate increase may jeopardize the city’s economic recovery.
Since the Fed began its tightening cycle, borrowing costs of Hong Kong have risen in a volatile manner. This month, the one-month Hong Kong Interbank Offered Rate, or Hibor, rose to the highest level since 2007 which is 5.21%. As the rate serves as a benchmark for mortgage loans, any further pressure on it might jeopardize the city’s real estate market.
Bloomberg Intelligence mentioned that the Fed’s hawkish efforts may result in more Hong Kong liquidity tightening and an increase in Hibor rates. Most importantly, this might push prime lending rates above its current 5.75% level.
Over the last year, the HKMA has acted to support the local currency. As a result, the city’s liquidity pool has shrunk. Higher payment cash needs have also led liquidity to tighten.
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