Hong Kong’s Monetary Authority Raised Interest Rates 25bps Despite Banking Liquidity at 2008 Lows

The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, raised its benchmark interest rate for a tenth time this year, following the US Federal Reserve, by 25 basis points to 5.55% on Thursday. The latest move brought borrowing costs in the city to the highest level since January 2008. Hong Kong raises rates in line with the Fed due to the Hong Kong Dollar’s peg to the US Dollar. The weakness in the HKD forced the bank to deplete banking system cash to 15-year lows.

Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.

Hong Kong Dollar

“Rate hikes in the U.S. will not affect the financial and monetary stability of Hong Kong, …. The market has continued to operate in a smooth and orderly manner and the total deposits in the banking system in Hong Kong have also remained stable.”

Eddie Yue, Chief Executive of the HKMA, told reporters.

Defending the Peg

The HKMA move came after another round of intervention by the HKMA to defend the Hong Kong dollar bumping into the weakest end of the peg at 7.85.

Persistent intervention by the HKMA has failed to put a floor under the Hong Kong dollar and interbank rates, as investment inflows from mainland China and a weak domestic economy have sapped loan demand.

The HKMA bought HK$4.671 billion ($595.1 million) from the market in New York trading hours, adding to the $37.5 billion worth of Hong Kong dollars it has soaked up through 49 rounds of interventions since the Fed began hiking interest rates in March 2022.

The aggregate balance will decrease to HK$44.527 billion on May 5, an HKMA spokesperson said. It has been below 2020 levels since late April, and is now at the lowest levels since 2008.

Three-month Hong Kong dollar interbank offer rates (HIBOR) have risen this week to around 3.99%, but are still down a percentage point from December levels and 135 bps below U.S. yields, rendering the Hong Kong dollar cheap for funding overseas carry trades.

Hong Kong Retail Sales Hit Record-High YoY

Retail sales in Hong Kong jumped to a record-high of 39.4% year-on-year in March 2023, quickening from a 29.7% growth in the previous month. Sales rose sharply for jewelry, watches, clocks & valuable gifts (174.9% vs 133.2%), clothing, footwear & allied products (127.1% vs 93.1% in February), department stores (32.2% vs 15.4%), other consumer goods (47.4% vs 31.7%), and food, alcoholic drinks & tobacco (13.5% vs -0.1%).

Meanwhile, sales slowed for consumer durable goods (10.5% vs 35.3%) and fuels (16% vs 24.4%), while decreased at a slower pace for supermarkets (-11.6% vs -24.4%). Looking ahead, the government emphasized that the retail industry should continue to gain from the recovery of inbound tourism and private consumption.

Hong Kong was already struggling after Beijing’s crackdown on technology and private education firms back in July, and then the debt crisis at mainland Chinese developer China Evergrande Group. In an already precarious situation with the Chinese property market implosion higher rates have helped drive Hong Kong’s property market into a rare downturn, prices of residential properties and rent for office space also collapsed.

The HKMA said Hong Kong interbank rates, which have been rising over the past few months, will likely rise further with the Fed’s latest rate hike, and that people should therefore carefully assess the interest rate risk with mortgages and other borrowing decisions.

Hong Kong’s biggest banks such as HSBC Holdings Plc and Standard Chartered Plc are expected to hike their prime rates later today for the fifth time this year.

The Fed’s aggressive monetary tightening this year has raised concerns about Hong Kong’s linked exchange rate system, including its sustainability and relevance. Just last month, American investor Bill Ackman who founded hedge fund Pershing Square Capital Management, said that the mechanism no longer made sense for the city. He placed a monstrous bet for it to fail shorting the Hong Kong dollar.

The Hong Kong Monetary Authority however has said that it does not need or intend to change the system, citing strong buffers and deep liquidity in the banking system.

Source: HKMA

From The TradersCommunity Research Desk