HK authority ups rates, matching Fed, says banks' bad loans remain steady (updated)

Boc Hong Kong Holdings

27/07/2023 24:08

(Adds banks' decisions on rates)
    By Georgina Lee and Donny Kwok
       HONG KONG, July 27 (Reuters) - The Hong Kong Monetary
Authority (HKMA) on Thursday raised its base rate charged
through the overnight discount window by 25 basis points to
5.75%, the highest in 16 years, hours after the U.S. Federal
Reserve delivered a rate hike of the same margin.
    Immediately after the announcement the Hong Kong dollar
 HKD=3  strengthened to 7.7951 per dollar, its strongest level
in eight months.
    Hong Kong's monetary policy moves in lock-step with the
United States as the city's currency  HKD=D3  is pegged to the
greenback in a tight range of 7.75-7.85 per dollar.  
    The Fed raised interest rates by a quarter of a percentage
point, with Chair Jerome Powell saying the economy still needed
to slow and the labour market to weaken for inflation to
"credibly" return to the U.S. central bank's 2% target.
    "Under the linked exchange rate system, Hong Kong interbank
offer rates will track the U.S. rates closely so that the spread
between the two gradually narrows," HKMA acting chief executive
Arthur Yuen told a press briefing. 
    While companies may face higher costs on Hong Kong dollar
bank loans, "we haven't yet seen that the higher funding costs
impacting banks' clients directly."
    "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% in the first
quarter.
    While Hong Kong's official base rate follows the Fed's
policy rate, banks are not obliged to remain in  lock-step with 
U.S. rates, especially when they see ample liquidity in the
system, as interbank rates and banks' best lending rates are
also influenced by demand and supply, analysts said. 
        A 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
 HIHKD1MD= , the benchmark that banks use to price their
residential mortgage loans, to surge to a 16-year high of 5.21%
earlier this month, as it caught up and exceeded the one-month
U.S. secured overnight financing rate (SOFR)  USSOFR1M=R  before
trending lower this week. 
    "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 Chinese
companies after August will help loosen Hong Kong dollar
liquidity conditions, he added. 
    To keep profit margins from being squeezed by the higher
funding rates, major banks in Hong Kong on Thursday also raised
their prime rates, which are one of the commonly used benchmarks
for pricing mortgage loans. 
        HSBC Holdings  0005.HK   HSBA.L  and Standard Chartered
(Hong Kong)  2888.HK  both said they would raise their
respective best lending rates in Hong Kong by 12.5 basis points
(bps) to 5.875% and 6.125% respectively, while Bank of China
(Hong Kong) 2388.HK  will raise its prime rate by 12.5 bps, to
5.875%.

    

 (Reporting by Georgina Lee and Donny Kwok; Editing by Tom
Hogue, Sandra Maler & Simon Cameron-Moore)
 ((donny.kwok@thomsonreuters.com; +852 3462 7745; Reuters
Messaging: donny.kwok.reuters.com@reuters.net))