The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, raised its benchmark interest rate for an eighth time this year, following the US Federal Reserve, by 25 basis points to 5.00% 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.
Hong Kong’s economy is not a strong position with GDP shrinking 4.2% yoy in Q4 of 2022, the fourth straight period of decline and the contraction of 3.5% in the entire year following a 6.4% growth in 2021.
Hong Kong has been hit by its own pandemic measures and the spillover from China’s zero COVID policy while risks from cost pressures persist. Hong Kong’s top leader John Lee said that he aims to scrap all coronavirus curbs this year and help the city return to normal life.
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.
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 fourth 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.
From The TradersCommunity Research Desk