Hong Kong Banks Maintain Lending Rates Even as HKMA Hikes

(Bloomberg) -- Hong Kong's banks maintained their best lending rates on Thursday even as the monetary authority raised its benchmark interest rate, likely providing the economy some relief as it tries to recover from a crushing omicron outbreak.

HSBC Holdings Plc and Standard Chartered Plc both announced they would not change their best lending and savings rates, hours after the Hong Kong Monetary Authority raised its base rate to 1.25% from 0.75%. The HKMA's decision moved in lockstep with the U.S. Federal Reserve's decision to raise rates by a half-point, its second interest rate hike this year. The Hong Kong dollar is pegged to the U.S. currency.

The Fed's hawkish path is putting pressure on Hong Kong, which as a result needs to hike rates even as its economy has been throttled by virus restrictions and trade disruptions stemming from outbreaks in China. Hong Kong has accelerated its re-opening by lifting restrictions, and a gauge of private sector activity improved last month, showing early signs of a rebound. But there's still plenty of uncertainty around China's economic outlook.

That makes the local bank rate decisions all the more important, given their ability to encourage more lending and borrowing even as the benchmark rate tightens. In Hong Kong, the best lending rates are used as a base for banks to quote interest rates on mortgage loans.

The divergence between the benchmark rate and the bank lending rates will start to weigh on banks' profits if they don't start to raise their own rates in the future. But that possibility is still probably some time away, according to Heron Lim, an economist at Moody's Analytics.

“The impact on profit margins will be kept minimal at the start,” Lim said, adding that customer deposit levels are above pre-Covid levels and banks have not shifted their prime rates significantly since 2008 due to a “massive” deposit base.

Given the rising interbank rates, however, bank profit margins “may start to be squeezed” eventually, Lim said. He pointed to the Fed's last rate hike cycle from 2015 and 2018, saying that banks started raising their rates toward the end of that time period. “That may be the time frame expected,” he added.

The central bank's benchmark rate hikes, meanwhile, will not affect the city's financial and monetary stability, HKMA Chief Executive Eddie Yue said at a press briefing on Thursday.

“The short-term risk due to the rate hike should be quite manageable because local liquidity remains extremely abundant,” said Dah Sing Bank Ltd. senior economist Gary Wan, adding that the central bank is capable of coping with potential outflows. “However, if the Fed supports further front-loading of rate hikes, it could weigh on Hong Kong's asset markets and hold back both domestic and external demands.”

The local dollar is coming under pressure as rising U.S. interest rates reduce the appeal of Hong Kong assets. The currency has slid toward the weak end of its trading band for the first time in more than three years, and a breach would prompt the HKMA to intervene in the foreign exchange market.

Yue said the currency's weakness poses no risk to liquidity. The Hong Kong dollar was little changed Thursday.

Still, there has recently been debate about the sustainability of the Hong Kong dollar's peg to the U.S. dollar. HKMA Deputy Chief Executive Edmond Lau said last month the linked rate system is running smoothly and there are no plans to change it.