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Hong Kong tracks Fed rate hike, impact on economy seen limited
HONG KONG, June 14, 2018 (AFP) – Hong Kong’s de facto central bank tracked
the US Federal Reserve in lifting interest rates again on Thursday, but
analysts said homeowners in the city’s red-hot property market would be
cushioned from the impact for now.
The US central bank on Wednesday lifted borrowing costs, as expected, but
indicated another two hikes this year and four in 2019 as the world’s top
economy continues to improve and inflation picks up.
The 25 basis points rise to 1.75-2.0 percent was followed hours later by
the Hong Kong Monetary Authority (HKMA), which hiked its base rate a similar
amount to 2.25 percent.
Policymakers in the southern Chinese financial hub are required to follow
the Fed as their monetary policy is tied via the decades-old dollar peg.
However, the move is unlikely to see mortgage rates in the city rise any
time soon as a huge well of cash in the city’s banking system means lenders
have ample liquidity, keeping the crucial Hong Kong InterBank Rate (HIBOR)
subdued.
The increase comes as Hong Kong’s property market, one of the world’s most
expensive, continues to power ahead despite government moves to cool it down.
And analysts said the city’s strong economic growth — it grew at its
fastest pace in seven years in January-March — will keep property prices
buoyant.
“The Fed hike in June will probably not spill over to the real economy in
Hong Kong, given the federal funds rate is still relatively low compared with
levels in the previous tightening cycles,” Tristan Zhuo, senior economist at
Bank of China (Hong Kong) told Bloomberg News.
But the HKMA’s chief executive Norman Chan said Thursday he felt it was
“only a matter of time” before banks increased their saving rates and best
lending rates.
Ken Cheung, a senior currency strategist at Mizuho Bank in Hong Kong, told
Bloomberg News: “Major banks will raise the prime rate first — as soon as
this week — and other smaller lenders will follow their lead to do the
same.”
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But he added: “Direct impacts on the housing market should be limited.”
The Hong Kong dollar has come under increasing pressure in recent months
as rising US rates are causing investors to sell the unit and buy the higher-
yielding greenback.
The HKMA has spent billions this year supporting the currency as it hits
the bottom end of its permitted HK$7.75-7.85 band against the US dollar.
Under the Linked Exchange Rate System, the authority is required to buy
the local currency at HK$7.85 to US$1 if local banks request it.
The People’s Bank of China did not follow suit — as it has with past
hikes — and lift the amount it charges to lend to banks, which analysts said
indicated officials may be changing policy to combat slowing growth.
“China’s new leadership was greeted by a much more challenging environment
in 2018,” said Ting Lu, Chief China Economist at Nomura investment bank,
adding Beijing would likely lower rates and pick up spending in coming months
to shore up growth.
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