Hong Kong central bank raises rates, warns of tighter interbank market

Reuters

Published Jul 27, 2022 07:15PM ET

Updated Jul 28, 2022 04:41AM ET

By Donny Kwok and Kiki Lo

HONG KONG (Reuters) -The Hong Kong Monetary Authority (HKMA) on Thursday raised its base rate charged through the overnight discount window by 75 basis points to 2.75%, 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 that of the United States as the city's currency is pegged to the greenback.

HKMA chief executive Eddie Yue said he expects the city's overnight and one-month interbank rates, as well as short-term rates, to accelerate at a much faster pace.

"With funds flowing out from the Hong Kong dollar system, the interest rate automatic adjustment mechanism will kick in, driving the Hong Kong dollar interbank rates to gradually rise and track the U.S. dollar rates," Yue said.

"This will help offset the incentives for carry trade and stabilise the Hong Kong dollar within the 7.75 and 7.85 range," he added, referring to the tight band of the city's peg to the U.S. dollar.

Soon after, Finance Secretary Paul Chan told reporters the city's property market, where homes are among the least affordable in the world, had "strong underlying demand" and could withstand higher interest rates.

"The basics of our property market remain resilient, although the sentiment will be dampened because of the increased mortgage payments and the expectation of the rate to go up further," Chan said.

He added Hong Kong banks also had ample liquidity, as well as low exposure to property developers in mainland China which are facing a severe downturn.

Hong Kong private home prices fell at a faster pace in June and dropped to the lowest since December 2020, official data showed on Wednesday, as homebuyers stayed on the sidelines due to an uncertain outlook.

Major banks in the city left their lending rates unchanged on Thursday with HSBC maintaining its best lending rates at 5% but raising its U.S dollar savings rate to 0.25% from 0.001%.

Standard Chartered (OTC:SCBFF) and Bank of China (Hong Kong) said they would leave their Hong Kong dollar best lending rate and savings deposit rates unchanged.