Hong Kong holds base rate at 5.75% while US Fed assures market that delayed rate cuts have not been derailed

The Hong Kong Monetary Authority on Thursday left its base rate unchanged for the sixth time in a row since July 2023
HSBC, Standard Chartered and BOCHK to relay their decision on whether to raise prime rates later in the day

Banking & finance

Enoch Yiu

Published: 7:02am, 2 May 2024

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Hong Kong kept the city’s key interest rate unchanged for the sixth consecutive time in lockstep with the Federal Reserve’s overnight decision, as stubborn inflation in the United States pushed back expectations of a rate cut to September.

The Hong Kong Monetary Authority (HKMA) said on Thursday it would leave its base rate unchanged at 5.75 per cent. Hours earlier, the Fed kept its target rate in a range between 5.25 per cent and 5.5 per cent, citing several “hotter-than-expected” price and growth reports.

“In recent months, inflation has shown a lack of further progress toward our 2 per cent objective,” Fed Chairman Jerome Powell said. “It is likely that gaining greater confidence will take longer than previously expected.”

The HKMA follows the Fed’s rate decision in lockstep since 1983 by design under its linked exchange rate system to preserve the local currency’s peg to the US dollar.

The HKMA and the Fed have kept their key lending rate at the current level since July 2023 when they last raised rates by 25 basis points. The US and Hong Kong have increased their rates 11 times between March 2022 and July 2023, taking it to the highest level since December 2007.

The Federal Reserve building in Washington DC on April 3, 2012. Photo: Reuters

Core US inflation rose 3.7 per cent in the first quarter, above the Fed’s target of 2 per cent.

“The US central bank needs more confidence in the path of inflation before it can cut rates,” said Franck Dixmier, global CIO for fixed income at Allianz Global Investors, in a research note before the Fed’s decision. “Recent data showing slowing growth, but higher-than-expected inflation has delayed the rate-cutting cycle, but not derailed it.”

Powell sought to assure the market, saying that it would be “unlikely” for the Fed’s next move to raise rates, adding that officials would need to see “persuasive evidence that policy is not tight enough” before taking action.

The Fed’s decision was widely expected, as more than 97 per cent of traders expected the US central bank to leave the interest rate after its policy meeting, according to data compiled by CME Group, based on Fed fund futures contracts on Tuesday.

More than 80 per cent of traders also expected the Fed to hold fire at the next two meetings in June or July and September, while over half believe a rate cut will be announced in September.

Still, Powell’s softer-than-expected stance unleashed a rally in the US bond market, with Treasuries climbing across the yield curve.

“The earliest possible adjustment of interest rate in the US may be in July,” said Eric Tso Tak-ming, chief vice-president of mortgage broker mReferral, adding that it would take time for prime lending rates in Hong Kong to normalise.

The market had already priced in a rate cut this year, Tso said before the Fed’s latest decision. As a result, any changes to the interest rate will not have an impact on the city’s property market, he added, noting that home transactions started increasing in March after the government completely removed all levies the previous month.

One-month Hibor, or the Hong Kong interbank offered rate, fell to 4.2998 per cent on Tuesday, from 4.9853 per cent on January 2. Three-month Hibor fell to 4.5525 per cent from 5.0716 per cent over the same period, according to data published by the Hong Kong Association of Banks.

Hong Kong Monetary Authority at the International Financial Centre Building in Central. Photo: Shutterstock

HSBC, Standard Chartered, Bank of China (Hong Kong) (BOCHK) and other lenders will announce whether they plan to adjust their prime rates and deposit rates. The city’s lenders raised their prime rates five times from September 2022 to July 2023 by a total of 87.5 basis points to the highest since 2007.

The prime rate at BOCHK, HSBC and its subsidiary Hang Seng Bank is set at 5.875 per cent. The rate at Standard Chartered, Bank of East Asia, Citigroup, CCB Asia and other lenders stands at 6.125 per cent.

“Hong Kong’s property market will still be under some pressure because the mortgage rate is still about 1 percentage points higher than the rental yield, dampening investment demand,” said Tommy Ong, managing director of T.O. & Associates Consultancy.

“The stock market in Hong Kong will probably retrace some of its recent gains, but the magnitude will not be large as the newly announced regulatory measures have given foreign investors more confidence in China’s and Hong Kong’s markets.”

The China Securities Regulatory Commission (CSRC) on April 19 unveiled five measures to help halt a market slump and revive confidence in the nation’s capital markets.

Among the measures, the CSRC will facilitate listings in Hong Kong by the mainland’s industry-leading companies and expand the Stock Connect cross-border investment scheme.

The benchmark Hang Seng Index rose almost 8 per cent in April, beating all other major equity gauges in the world. At one point, it rose 20 per cent from a January low, gains seen by technical traders as entering a bull market.