Hong Kong’s borrowing cost keeps falling, even as benchmark rate rises

HONG KONG - The Hong Kong Monetary Authority (HKMA) raised its benchmark interest rate in line with the United States Federal Reserve on Thursday, in a move that is 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 per cent 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 mean banks are not under pressure to follow suit. The one-month Hong Kong Interbank Offered Rate, known as Hibor, has fallen to 2.66 per cent from a 15-year high of 5.08 per cent 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 in 2022 as Hibor spiked higher, putting the city’s economy under additional strain. HSBC Holdings Plc said on Thursday that it would not change its rate this time – a decision that will be good news for businesses and home owners struggling with a contracting economy and tumbling property prices.

The city’s gross domestic product shrank 3.5 per cent in 2022, its third contraction in four years, as slowing global demand, rising interest rates and a prolonged exit from isolating Covid-19 curbs weighed heavily on the financial hub. Home prices plunged about 16 per cent 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 its zero-Covid policy. The benchmark Hang Seng Index has surged about 50 per cent since the end of last October, with US$1.6 trillion (S$2.09 trillion) added to the value of the local stock market.

The decline in borrowing costs is likely to be short-lived, 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 towards 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. 

“The rate-hike cycle in the US has not yet been completed,” said Mr Eddie Yue, chief executive of the HKMA, at a press briefing on 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 per cent in 2023 as leasing demand grows and elevated mortgage costs deter potential home buyers, they wrote. BLOOMBERG