© Reuters. FILE PHOTO-Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA) poses for a picture during an interview with Reuters in Hong Kong, China November 4, 2022. REUTERS/Tyrone Siu
HONG KONG (Reuters) -The Hong Kong Monetary Authority (HKMA) raised its base rate charged through the overnight discount window by 25 basis points to 5.0% on Thursday, hours after the U.S. Federal Reserve delivered a rate hike of the same margin.
Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.
“Rate hikes in the U.S. will not affect the financial and monetary stability of Hong Kong,” HKMA chief executive Eddie Yue told a media briefing, adding monetary and financial markets continue to operate in a smooth and orderly manner.
In announcing its latest policy decision, the U.S. central bank scaled back to a quarter-percentage-point rate increase after a year of larger hikes and Fed Chair Jerome Powell suggested a “couple” more hikes coming.
“The rate hike cycle in the U.S. has not yet completed, the Hong Kong dollar interbank rates might remain at elevated levels for some time,” Yue said.
However, HSBC Holdings (NYSE:) said it was leaving its best lending rate in Hong Kong unchanged at 5.625%, despite a raise by the city’s de facto central bank.
Hong Kong is facing risks from high inflationary pressure and aggressive monetary tightening in advanced economies. Higher borrowing costs and a pessimistic economic outlook have hit asset prices, dragging 2022 private home prices down 15.6% in the first annual drop since 2008.
Cases of negative equity in the city’s residential mortgage loans jumped nearly 22 fold in the fourth quarter from the previous one, as home prices continued to fall during the period.
HKMA said the surge in negative equity mortgage cases was “controllable”, urging the public to prepare for the likelihood that bank lending rates might go higher and that homebuyers should be prudent in making borrowing decisions.
On Wednesday, the Hong Kong Monetary Authority (HKMA) raised interest rates after the US Federal Reserve increased its benchmark rate in December. The HKMA raised its prime lending rate by 25 basis points to 4.5%, which is just below the heightened US rate of 4.5%.
However, despite the rate increase, Hong Kong’s largest lender HSBC has decided to keep its interest rates unchanged. The bank said that while they recognize the importance of the HKMA’s decision, the need for the bank to remain competitive and provide value for customers outweighs any potential benefit to their bottom line.
The move by the HKMA and decision by HSBC reflect the current economic conditions in Hong Kong. The territory has seen economic growth slow due to the ongoing trade tensions between the US and China. As a result, the HKMA has opted to raise interest rates to help soften the blow of a possible economic slowdown.
HSBC, on the other hand, is looking to maintain its competitive edge by not raising rates. The bank believes that by keeping its rates static, customers will be more likely to use their services as other banks raise their rates.
In conclusion, the HKMA’s decision to raise interest rates is a response to the current economic headwinds in Hong Kong. While HSBC has chosen to keep its rates unchanged, this does not mean it will not adjust them in the future. Nevertheless, the decision by the central bank should help to soften any economic slowdown in the territory and provide the necessary support for businesses and consumers.