A woman walks past the entrance to the Hong Kong Monetary Authority in Central, Hong Kong, on April 11, 2023. (CALVIN NG / CHINA DAILY)

HONG KONG - The Hong Kong Monetary Authority on Thursday raised its base rate charged through the overnight discount window by 25 basis points to 5.75 percent with immediate effect, hours after the United States Federal Reserve delivered a rate hike of the same margin.

In a statement released on Thursday morning, the HKMA said the base rate is currently set at either 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs), whichever is the higher.

Following the 25-basis point upward adjustment in the target range for the US federal funds rate on Wednesday, 50 basis points above the lower end of the prevailing target range for the US federal funds rate is 5.75 percent, while the average of the five-day moving averages of the overnight and one-month HIBORs is 4.78 percent, the HKMA said.

Under the linked exchange rate system, Hong Kong interbank offer rates will track the US rates closely so that the spread between the two gradually narrows.

Arthur Yuen Kwok-hang, HKMA Acting Chief Executive

The base rate is therefore set at 5.75 percent according to the pre-set formula, the HKMA said, adding that the base rate is the interest rate forming the foundation upon which the Discount Rates for repurchase transactions through the Discount Window are computed.

"Under the Linked Exchange Rate System (LERS), Hong Kong interbank offer rates will track the US rates closely so that the spread between the two gradually narrows," HKMA Acting Chief Executive Arthur Yuen Kwok-hang told a media briefing.

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While corporates may face higher costs on Hong Kong dollar bank loans, "we haven't yet seen that the higher funding costs impacting banks' clients directly."

On Thursday, HSBC Holdings said it is raising its best lending rate in Hong Kong by 12.5 basis points to 5.875 percent effective July 28 and would raise the savings rate for its US dollar savings deposits by 12.5 basis points to 1.0 percent per annum from 0.875 percent effective on Friday.

Asked whether the outflow of funds from Hong Kong will be slowed by the peak in the US interest rate hike cycle, Yuen pointed out that sufficient funds still remain in the city’s financial system although some have been switched to US dollar. 

“Deposits in the banking system are still rising, and there is no outflow of funds from the financial system,” he said.

Pedestrians use a crossing in Central, Hong Kong, on Feb 28, 2023. (ANDY CHONG / CHINA DAILY)

Yuen said that the future US interest rate path will be contingent on incoming inflation and employment data, as well as the impact of earlier rate hikes on the economy, and that the high interest-rate environment may last for some time.

“Under the Linked Exchange Rate System, as the US has continued to raise interest rates, Hong Kong dollar interbank rates have gradually risen in recent months. The public should be mindful of interest-rate movements and relevant risks when purchasing property, taking out mortgages or making other borrowing decisions,” Yuen cautioned.

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Under the Linked Exchange Rate System, as the US has continued to raise interest rates, Hong Kong dollar interbank rates have gradually risen in recent months. The public should be mindful of interest-rate movements and relevant risks when purchasing property, taking out mortgages or making other borrowing decisions.

Arthur Yuen Kwok-hang, HKMA Acting Chief Executive

Hong Kong's monetary policy moves in lock-step with the US as the city's currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.

"Classified loans", or those that are overdue for at least 30 days together with those that are deemed uncollectible, have stayed steady from the end of last year, at 1.4 percent in the first quarter this year.

While Hong Kong's official base rate follows the Fed's policy rate, banks are not obliged to remain in lock-step with US rates, especially when they see ample liquidity cushion in the system, as interbank rates are also influenced by demand and supply, analysts said.

Another seasonal factor that has led Hong Kong interbank offered rates higher in recent months is companies' demand for the local currency for dividend payments, Yuen said, which traditionally peaks from June to August.

This has led the one month Hong Kong interbank rate , the benchmark that banks use to price their residential mortgage loans, to surge to a 16-year high of 5.21 percent earlier this month, as it caught up and exceeded the one-month US secured overnight financing rate (SOFR) before trending lower this week.

This file photo taken in Hong Kong on Jan 12, 2008 shows Hong Kong dollar and US dollar banknotes. (PHOTO / AFP)

Yuen added that Hong Kong dollar exchange rate has strengthened in recent months, driven by dividend payment-related demand from listed corporations, reflecting the effective operation of the automatic interest-rate adjustment mechanism under the LERS.

“The HKMA will continue to closely monitor market developments and maintain monetary and financial stability,” Yuen reiterated.

READ MORE: HKMA relaxes loan rules for residential properties

The Federal Reserve raised interest rates by a quarter of a percentage point and Fed Chair Jerome Powell said the economy still needed to slow and the labor market to weaken for inflation to "credibly" return to the US central bank's 2 percent target.

"We expect Hong Kong dollar rates to remain high as the Fed is unlikely to reverse its tightening to an easing this year," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

The end of dividend flows from Hong Kong-listed mainland companies after August will help loosen Hong Kong dollar liquidity conditions, he added.

With Reuters inputs