HKMA Increases Its Base Rate Following Fed Rate Rise

Hong Kong Monetary Authority (HKMA) chief Eddie Yue on Thursday said local inter-bank interest rates were set to rise further following the latest move by the US central bank to raise borrowing costs.

The HKMA increased its base rate to 5.5 percent from 5.25 percent, hours after the US central bank, the Federal Reserve, raised its key interest rate by a quarter of a percentage point overnight.

"Over the last few months, Hong Kong dollar inter-bank rates have been rising gradually. As the US raises rates again this time, this trend is expected to continue," Yue said.

But he said the pace of any increase will be subject to the supply and demand of the local funding market. And, on whether commercial banks would adjust their borrowing costs, Yue said that would depend on their own funding costs and other commercial considerations.

He said the public should be prepared for movements in bank lending rates and borrowers should carefully assess risks when taking out mortgages or making other borrowing decisions.

A rise in the Monetary Authority's base rate tends to make it more expensive for banks to borrow short-term money from the HKMA, through a liquidity facility known as the Discount Window.

It's the tenth consecutive US rate rise since March last year and it has taken US interest rates to their highest level in 16 years. The Fed chair, Jerome Powell, said the measure was taken to stabilise prices, although he signalled that this might be the last rise for now.

The HKMA bought HK$4.671 billion (US$595.1 million) from the market in Wednesday New York trading to stop the Hong Kong dollar weakening and to defend its peg to the US dollar of between HK$7.75 and HK$7.85.

It's the 50th round of intervention since the Federal Reserve began hiking US interest rates in March 2022.

The aggregate balance - the key gauge of cash balances in the banking system - will decrease to HK$44.5 billion on May 5, an HKMA spokesperson said on Thursday, the lowest level since 2008. (additional reporting from Reuters)

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