Hong Kong’s base rate would rise to a fresh 14-year high of 4.25 per cent with immediate effect, the Hong Kong Monetary Authority (HKMA) said.
The US stock market fell after the Fed chairman’s two-toned message about keeping rates high even if the battle against inflation was approaching an inflection point.
Hong Kong’s de facto central bank raised its base rate by a widely expected 75 basis points, increasing the city’s cost of money for the sixth time in eight months in lockstep with the Federal Reserve’s tight monetary policy to tamp down inflation.
The base rate would rise to a fresh 14-year high of 4.25 per cent with immediate effect, the Hong Kong Monetary Authority (HKMA) said in a statement before financial markets opened on Thursday. Hours earlier, the Fed raised its target rate by the same quantum to between 3.75 and 4 per cent, South China Morning Post reported.
Hong Kong’s cost of funds has surpassed the record 3.75 per cent last seen during the 2008 Global Financial Crisis. The HKMA has been conducting its monetary policy in lockstep with the Fed since 1983 to maintain the currency peg to the US dollar under the city’s linked exchange rate system.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
The world’s most powerful monetary authority has now increased its key rate by 75 basis points four times in the past six months – from near zero in March – to tame runaway inflation. US consumer prices surged at an annual rate of 8.2 per cent in September, slower than the preceding two months but still hovering near a four-decade high.
The HKMA’s chief executive Eddie Yue Wai-man, who is hosting the final day of the Global Financial Leaders’ Investment Summit, will issue a statement about the rate rise this morning. The monetary authority is trying to convince global financiers that Hong Kong is back to normality after three gruelling years of restrictions and quarantines to contain the Covid-19 pandemic.
The Fed’s November move was in line with market expectations. Expectations of a 75-basis point hike rose to 82.8 per cent last week, while the odds of a smaller 50-basis point increase was at 17.2 per cent, according to odds calculated from futures by CME Group.
Still, US markets were spooked by the Fed chairman Jay Powell’s two-toned message, where he said the battle against inflation will require borrowing costs to rise further, yet signalled the central bank may be approaching an inflection point.
That left open the possibility for the Fed to raise rates in smaller increments in the future, ending its sequence of 75-basis point hikes by December in favour of smaller increases of perhaps half a percentage point each. It also leaves policymakers the wriggle room to push rates higher if prices do not start to taper, as October inflation is projected to have picked up pace again at 10.4 per cent.
The Fed’s mixed message erased earlier gains in the S&P index, causing it to fall 2.5 per cent while the Nasdaq Composite slid by more than 3 per cent at the end of Wednesday.
“The next task in the Fed playbook might prove a bit more complicated,” DWS’ US economist Christian Scherrmann wrote in a note before the Fed’s move. “The Fed needs to open a path towards smaller interest rate hikes without sounding too dovish. And ultimately it needs what we might call a hawkish pause.”
The higher base rate is likely to be followed by Hong Kong’s commercial banks. They may increase their prime lending rate by another 12.5 basis points to between 5.25 per cent and 5.375 per cent, analysts said. That would push the city’s prime lending rate to a 14-year high.
John Lee Urges Global Banks To ‘Get In Front’ As Hong Kong Roars Back
“The outflow from the banks’ current and savings accounts to other banks and to US dollar deposits may start to exert pressure” on Hong Kong’s banks, said T.O. & Associates Consultancy’s managing director Tommy Ong. “An increase of 0.125 per cent on both the prime rate and savings rate seems the most palatable option to them.”
Hong Kong’s one-month interbank offered rate (Hibor) rose to 3.2 per cent yesterday, while the three-month rate jumped to a 14-year high of 4.68 per cent and the 12-month rate surged to 5.3 per cent.
