HKMA tells HK to brace for volatility as ultra-low interest era ends

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, raised its base interest rate by 25 basis points for the fourth time this year, closely following the footsteps of the U.S. Federal Reserve (the Fed). Meanwhile, local banks kept their lending rates unchanged.

On Dec 20, the HKMA adjusted upward the base lending rate by 25 basis points to 2.75 percent with immediate effect, after the Fed raised the benchmark interest rate to a range of 2.25 percent to 2.5 percent.

The move by the HKMA maintains Hong Kong dollar’s stability as the city’s currency is pegged to the U.S. dollar.

According to the HKMA, the Base Rate is the interest rate forming the foundation upon which the Discount Rates for repurchase transactions through the Discount Window are computed.

“The Base Rate is currently set at either 50 basis points above the lower end of the prevailing target range for the U.S. federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates, whichever is the higher,” the authority says in a statement.

Mr Norman Chan Tak-lam, chief executive of the HKMA, said on Thursday that raising interest rates reflected a normalisation from a low rate environment.

Mr Chan speaks to the people

Mr Chan also warned of more downside risks to the economy from uncertainty over the Sino-U.S trade dispute, which has already affected the investment and business sentiment in Hong Kong.

He urged the public to be prepared for possible market volatility as interest rates will continue to rise.

“The banks that relied on interbank funding will feel the heat, and they may increase their best lending rate. This will add to costs for mortgage and other borrowers,” said Mr Chan.

“The expected interest rate rises next year, together with the U.S.-China trade war and Brexit, will all add risks to an economic downturn and volatile stock and property markets,” he added.

As for the property market, Chan said more data is needed and it is premature now to determine if the market is in a downward cycle. But if the market shows such signs, the HKMA may consider easing measures.

Meanwhile, in the private sector banks…

Despite the move by the HKMA, local banks have not followed suit.

The city’s largest banks, such as HSBC, Hang Seng Bank, Bank of China (Hong Kong) and Standard Chartered have maintained the same prime lending rates.

The rate of HSBC, Hang Seng Bank and Bank of China (Hong Kong) will stay at 5.125 percent, while that of Standard Chartered will be kept at 5.375 percent.

Analysts say commercial banks decide the prime rates in Hong Kong, so it is a commercial decision.

This is widely seen as a relief for the homebuyers, who could otherwise have faced higher mortgage payments.

This September, banks in Hong Kong raised interest rates by 12.5 basis points for the first time in 12 years, after the HKMA raised its benchmark interest rate by 25 basis points from 2.25 percent to 2.5 percent.

The move by the commercial banks was said to have put the property market under pressure. It had also prompted Mr Paul Chan Mo-po, the city’s Financial Secretary, to comment that the ultra-low interest rate environment in Hong Kong was over.

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