HSBC, the city’s biggest lender, said it is raising its prime rate by 25 basis points to 5.375% after the Hong Kong Monetary Authority increased its base rate earlier in the day.
The HKMA raised its benchmark interest rate by 75 basis points to 4.25% on Thursday, hours after the US Federal Reserve did the same. Hong Kong’s de-facto central bank raises rates in tandem with the Fed, given the local dollar’s peg to the US dollar, and has done so six times this year.
The higher commercial bank rates will “be a big blow to consumer and business spending and will strip optimism away”, said Heron Lim, an economist at Moody’s Analytics. He said prime rates in Hong Kong may even reach 5.75% by December after the next Fed meeting.
“The lack of consumer and business spending will impose a cap on Hong Kong’s recovery prospects for 2023 as consumers and businesses get used to a new normal,” he added.
Hong Kong’s banks for months this year kept their prime rates steady but began raising them in September as the city’s monetary policy tightening became more aggressive. The move that month by HSBC and Standard Chartered Plc to hike their rates was the first time those banks had done so since 2018.
At that time, HSBC’s Hong Kong chief executive Luanne Lim signalled that the lender was at the “beginning of an upward cycle”. The three-month interbank rate has already reached its highest level since the global financial crisis in October 2007.
Higher borrowing costs add to headwinds facing Hong Kong’s economy, which has been buffeted by weak global demand, a slow reopening after years of pandemic isolation, and a talent exodus amid political turmoil.
Officials announced this week that gross domestic product shrank 4.5% in the third quarter, far worse than expected, and Hong Kong seems likely headed for its third annual contraction in four years.
The data showed a sharp contraction in investment last quarter, a sign that rising borrowing costs are curbing demand, especially in the property market, which had previously enjoyed more than a decade of low, stable borrowing costs.
After the monetary authority raised its rates again, HKMA chief executive Eddie Yue warned the public to prepare for further increases in commercial interest rates and the Hong Kong dollar interbank rates.
Continuous rate hikes, though, “will not affect the financial and monetary stability of Hong Kong”, he said in a statement Thursday morning. “Our monetary and financial markets continue to operate in a smooth and orderly manner.”
Financial secretary Paul Chan, meanwhile, acknowledged that there is “still a high chance” that the US will continue to raise interest rates, adding that demand will continue to be depressed, affecting the city’s trade.
“The economic situation has been challenging, but if we are able to put Covid-19 under control, if we are able to continue travelling between Hong Kong and the rest of the world, that would provide added impetus to our economic growth,” he told reporters on the sidelines of the city’s global finance summit.
The Fed’s aggressive monetary tightening has also raised concerns about the sustainability of Hong Kong’s linked exchange rate system. In a speech at the finance summit, Chan defended the system, noting that the city has ample foreign currency reserve assets.
“We have built very strong buffers and resilience in the banking system to support this,” he said. “If you bet against the Hong Kong dollar, you are bound to lose.”