Pressure is increasing on Hong Kong’s banks to lift their main lending rates as liquidity tightens in the financial hub.
(Bloomberg) — Pressure is increasing on Hong Kong’s banks to lift their main lending rates as liquidity tightens in the financial hub.
The Hong Kong Monetary Authority raised its benchmark interest rate by 25 basis points to 5.5% on Thursday, following the US Federal Reserve. The rate moves in line with the Fed’s benchmark in order to protect the local dollar’s peg to the greenback.
Attention now turns to whether the city’s banks — including HSBC Holdings Plc and Standard Chartered Plc — will follow suit. HSBC, Hong Kong’s largest lender, kept its prime rate unchanged at 5.625% during the past two interest-rate increases in February and March.
The environment is turning tougher. Repeated interventions to protect the city’s currency peg are draining liquidity from the financial system and forcing short-term interbank borrowing costs higher. One-month Hibor has climbed to 3.63%, the highest in four months, and narrowing the spread with its US equivalent Libor to about 1.5% percentage points.
“The US Fed’s rate hike of 25 bps on May 3 could keep US short-term market rates elevated, fueling Hong Kong’s Hibor and driving banks to lift their prime rates to more than 6% later in 2023,” Bloomberg Intelligence analysts Francis Chan and Peter Lau wrote in a note Thursday.
The difference in yields has made shorting the Hong Kong dollar profitable, known as the carry trade. The result is the currency has traded near the weak end of its trading band against the greenback for much of this year, forcing the HKMA to step in every time it goes over the line. On Thursday alone, the HKMA spent HK$4.7 billion ($595 million) defending the peg.
The repeated interventions are lowering the aggregate balance, a measure of interbank liquidity, to HK$44.5 billion, its lowest level since 2008. The balance was 10 times that at HK$457 billion as recently as September 2021.
“With funds flowing out from the Hong Kong dollar system, the interest rate automatic adjustment mechanism will kick in, thereby driving the Hong Kong dollar interbank rates to gradually rise and track the US dollar interbank rates,” Eddie Yue, chief executive of the HKMA, said at a briefing Thursday. The speed and magnitude of the increase will be depend on the amount of dollars in the local funding market, Yue said.
Higher interbank rates raise funding costs for banks and puts pressure on them to hike their lending rates in order to maintain their profits. The best lending rates in Hong Kong are used as a base for banks to quote interest rates on mortgage loans.
Rising lending rates could add pressure on an economy that finally emerged from recession in the first quarter. Gross domestic product expanded 2.7% in the three months to March from a year earlier as the reopening of its borders revived spending. It was the first quarterly gain in gross domestic product in more than a year.
Fed watchers expected this rate increase to be the central bank’s final hike for a while, as tighter lending conditions and signs of a slowing economy suggest inflation will cool in the months ahead.
Yue also said that Hong Kong banks have no business dealings or risk exposure linked to troubled banks in the US, and that the direct impact on Hong Kong’s financial system is “very small.”
–With assistance from Richard Frost.
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