Hong Kong raises base rate at the slowest pace since May 2022, offering relief to city’s slumping economy as US inflationary pressure eases

The slower pace could bring some much-needed respite for Hong Kong’s economy, which is trying to grow its way out of recession
The slower increase, done in lockstep with the Federal Reserve, came after US inflation slowed to 6.5 per cent in December, from June’s peak of 9 per cent

Hong Kong’s borrowing cost rose at the slowest clip since May 2022, as the de facto central bank followed the US Federal Reserve in moderating its rate hikes, offering much-needed respite for the city’s economy.

The city’s base rate rose by 25 basis points to a 15-year high of 5 per cent on Thursday, as the Hong Kong Monetary Authority (HKMA) adjusted its monetary policy in lockstep with the Fed to maintain the city’s currency peg to the US dollar.

Hours earlier, the Fed increased its target rate by the same increment to between 4.5 per cent and 4.75 per cent, in line with market expectations. Rates rose seven times in 2022 by between 25 and 75 basis points.

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The slower pace of increases since four consecutive 75-basis point increases from June to November underscores how the Fed is taking the pressure off the throttle as US inflationary pressure showed signs of abating. Prices rose 6.5 per cent in December, a slower pace compared with the peak of 9 per cent in June.

“The pace of rate hike has further moderated since the last rate decision, and that reflects the need for the Fed to more carefully assess the US economic and inflationary trends”, the HKMA’s chief executive Eddie Yue Wai-man said after raising the city’s base rate.

Hong Kong’s base rate now stands at a level last seen in January 2008. The slower hike should provide some relief for the local economy, which is trying to grow its way out of recession amid plunging home prices that drove negative equity – where home value is less than the mortgage – up by almost 22 times to an 18-year high of 12,614 cases.

Negative equity is “inevitable”, due to the 15-per cent drop in home prices last year, Yue said, adding that the overall bad debts among mortgages stood at a “very low level” of 0.06 per cent.

Hong Kong’s negative equity soars to 12,164 cases as home prices fall

Still, the current rate-increase cycle is ongoing, and Hong Kong’s borrowers should brace themselves for “the likelihood that banks’ lending rates may [trend] higher and should carefully assess and manage the relevant risks while making property purchases, taking out mortgages or making other borrowing decisions”, he said.

Fed Chairman Jerome Powell reiterated that the monetary authority still had a lot of work to do to bring US inflation down to the desired range of about 2 per cent. But traders took solace from his sanguine attitude towards last month’s rally in financial markets, as he downplayed any concerns that frothy asset prices could hamper the fight to tame inflation.

“Our focus is not on short-term moves, but on sustained changes” to financial conditions, Powell said. That unleashed a late rally in New York, driving the S&P 500 Index up by 1.8 per cent from an intraday low during Powell’s 45-minute press conference. The Dow Jones Industrial Average rose 6.9 points from its intraday low.

Hong Kong’s benchmark Hang Seng Index rose 0.9 per cent when trading commenced after the HKMA’s quarter-point rate increase, and was recently trading 1.1 per cent higher. China’s technology stocks like Baidu and SenseTime led advances.

All eyes are on the city’s commercial banks, as they consider whether to pass the higher cost of funds to customers.

“While the rate rise will add to the burden of mortgage borrowers, it is still at an affordable level for most homebuyers”, said Shanghai Commercial Bank’s research head Ryan Lam Chun-wang, adding that he expects local banks to raise their prime rates by 25 basis points.

Not all analysts agree. “Banks will probably keep the prime rate constant at 5.625 per cent since the interbank interest rate has been falling fast in past month”, said Tommy Ong, managing director of T.O. & Associates Consultancy.

After raising the prime rate three times by a total of 62.5 basis points last year, HSBC, Bank of China (Hong Kong) and Hang Seng Bank now price their best lending rate at 5.625 per cent per annum. The rate offered by Standard Chartered and Bank of East Asia has climbed to 5.875 per cent.

© Provided by South China Morning Post
Advertisements at a Hong Kong real estate agency on 27 January 2023. Photo: Xiaomei Chen

“The Hong Kong dollar interbank rates might remain at elevated levels for some time”, Yue said.

The one-month Hong Kong interbank offered rate (Hibor) – a measure of the interest banks charge each other to borrow money – dropped to 2.65 per cent on Wednesday, compared with 4.34 per cent at the end of last year. Three-month Hibor sank to 3.6 per cent from 4.99 per cent during the same period, according to data from the Hong Kong Association of Banks.

“The rise in the US interest rate, and hence the Hong Kong interest rate, in the past year has been drastic”, said Ong. “The increase in interest expenses for Hong Kong’s small-and-medium enterprises has increased their running costs, discouraging investment.

“However, with more expectations of a Fed pivot, the market is now inclined to think the Hong Kong interest rate has already topped out in December, hence improving the sentiment on stocks and property prices. The negative impact on property prices due to interest rate hikes should be over”.

© Provided by South China Morning Post
Chief Executive of Hong Kong Monetary Authority (HKMA) Eddie Yue Wai-man (left) during a press conference on 30January 2023. Photo: Jonathan Wong

The market expects another two 25 basis-point rate hikes in the US in the coming months, taking it to 5 per cent in the second quarter of the year.

“But if recent trends validate that the inflation peak is behind us in the US, core inflation remains high, in a context where economic activity continues to show some resilience”, Franck Dixmier, global CIO fixed income at Allianz Global Investors, said in a research note on Wednesday ahead of the rate rise.

“As a result, we do not expect any complacency from the Fed. It should reaffirm its willingness to keep rates high for a long time to come, to ensure a sustainable decline in inflation towards its price stability objective”.

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The latest rate rise by the Fed is its eighth since last March, and takes the total increase in the key rate to 4.5 percentage points, double the 2.25 percentage points increase during the last rate-hike cycle from 2015 to 2018.

The payment on a typical HK$5 million (US$643,000) mortgage in Hong Kong over 30 years rose by 8 per cent, or HK$1,722, to HK$22,802 per month following the three increases in prime rates last year, according to calculations by local mortgage broker mReferral.