The Hong Kong Monetary Authority held its base rate steady at 5.5% on Thursday after the US Federal Reserve paused its cycle of interest rate increases for the first time in 15 months.
(Bloomberg) — The Hong Kong Monetary Authority held its base rate steady at 5.5% on Thursday after the US Federal Reserve paused its cycle of interest rate increases for the first time in 15 months.
The HKMA moves in lockstep with the Fed, given the local currency’s peg to the US dollar.
The cost of interbank borrowing in Hong Kong continued to climb. One-month Hibor jumped 16 basis points, the biggest gain in more than a month, to 4.75% on Thursday. That’s more than double its 2.1% low in February. It’s still below the US equivalent.
“After the Fed pause, Hong Kong banks are likely to keep prime rate unchanged,” said Carie Li, global market strategist at DBS Bank in Hong Kong. “That said, the seasonal demand for Hong Kong dollar could still push up Hibor toward 5% by month-end.”
Rising rates have curbed depreciation pressure on the local currency, limiting the need for further intervention by the HKMA. The Hong Kong dollar hasn’t traded at the weak end of its trading band with the greenback since early May. Intervention drains liquidity from the financial system because the central bank buys Hong Kong dollars from banks, which forces local interest rates up.
The pause in rate hikes comes as the local economy is recovering, having emerged from recession as the opening of city borders revived spending. Economists estimate gross domestic product growth to accelerate to 4.6% for all of 2023.
The central banks’ hold also gives breathing room to the city’s banks, including HSBC Holdings Plc and Standard Chartered Plc. HSBC on Thursday said it kept its best lending rate at 5.75%.
Last month, the city’s biggest banks raised their main lending rates for the first time in 2023 as liquidity shrank in the financial hub. They had resisted boosting those rates after two earlier HKMA hikes this year, though did so three times in 2022.
Meanwhile, the HKMA loaned out HK$661 million ($84 million) through its discount window on Wednesday, according to data compiled by Bloomberg. This marks the third time over the past month that lenders tapped the facility.
Li, the DBS strategist, said the root cause of the rising usage of the discount window is still a low Hong Kong dollar supply amid a low aggregate balance level.
“Also, if some banks use up the quota for borrowing in the interbank market, they may have to borrow from HKMA to meet the short-term liquidity demand,” she said.
–With assistance from Richard Frost and Chester Yung.
(Adds HSBC lending rate in seventh paragraph.)
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