Hong Kong interest rates to follow US Fed's lead

As the latter's set to lift rates.

The US Federal Reserve currently anticipates that it will hold the federal funds target rate unchanged at 0 – 0.25% for a “considerable time” after its asset purchase programme ends in October this year.

According to a research note from Hang Seng Bank, however, still, the latest forecasts made by members of its open market committee who are responsible for setting interest rates showed most of them seeing monetary policy tightening some time in 2015.

The median view among these Fed officials is for the fed funds target rate to rise to 1.375% at the end of 2015, implying at least four interest rate increases during the year.

With this, the report noted that Hong Kong interest rates will follow. Since 1983 the Hong Kong dollar (HKD) has been pegged to the US dollar (USD).

The HKD peg means that it will force Hong Kong interest rates to rise as the Fed begins to tighten policy next year.

This is because if the US interest rates are higher than Hong Kong, the HKD will come under selling pressure due to the interest rate differential.

When this happens, the supply of the HKD will decrease under the peg, or the Hong Kong Monetary Authority (HKMA) will directly buy the HKD and sell the USD in the markets. In either case, Hong Kong interest rates will pick up.

Here's more from Hang Seng Bank:

Under the peg, Hong Kong interest rates should move closely with the US interest rates. But domestic liquidity conditions could influence the degree of change.

In past cycles, the prime lending rate in Hong Kong often changed in a smaller magnitude than the US fed funds target rate, and this could happen again in the next tightening cycle.

In particular, the HKMA’s active use of the Exchange Fund bills and notes programme and the aggregate balance as policy tools in recent years has increased the chance that Hong Kong may delay rate hikes, and that Hong Kong interest rates may not need to rise as much as in the US4.

This means that while the city may also see higher interest rates over the coming years as the Fed tightens its policy, the timing and the magnitude of change may differ.

Also Read

Hong Kong green lights first Bitcoin, Ether EFTs

HKMA, HKAB anti-scam initiative strengthens with more sectors joining efforts

Since you're here...

...there are many ways you can work with us to advertise your company and connect to your customers. Our team can help you dight and create an advertising campaign, in print and digital, on this website and in print magazine.

We can also organize a real life or digital event for you and find thought leader speakers as well as industry leaders, who could be your potential partners, to join the event. We also run some awards programmes which give you an opportunity to be recognized for your achievements during the year and you can join this as a participant or a sponsor.

Let us help you drive your business forward with a good partnership!

I want to download the media kit