Higher interest rates loom amidst weakening dollar: FS Chan

Consumers may shoulder higher mortgage repayments soon.

Steeper interest rates may loom in the near future with Hong Kong tightening its monetary policy as the local currency plummeted to a thirteen year low last Thursday, Financial Secretary Paul Chan said in a blog post.

The Hong Kong dollar plunged to the weak end of the trading band at $7.85 as the interest rate gap between the US dollar and the local currency widened even further. This prompted the first intervention from the Hong Kong Monetary Authority since 2015 as it purchased a total of $3.26b in local currency to prop up the struggling dollar.

Looming interest rate hikes that may entail higher mortgage repayments for residents. In fact, the one-month interbank interest rates, which is often used as a benchmark for building mortgages, has grown from 0.22% in 2015 to 0.85%.

“We should not expect that the ultra-low interest rate environment will continue unabated. We must carefully consider whether it is possible to cope with the increase in interest expense on loans, and we must also pay attention to the increase in interest rates to asset prices,” Chan noted in his blog.

However, the FS urged the public not to worry about the massive capital outflow as he estimates the HKD exchange rate to stabilise in the long-term as the city’s high liquidity and credit-quality US dollar assets are more than able to meet exchange requirements which can buffer against the outflow of funds.

Local banks in Hong Kong held high liquidity assets of more than $4t at the end of 2017, and the liquidity coverage ratio of banks was close to a high level of 150%, Chan added.

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“In fact, Hong Kong’s financial and banking systems have always been highly resilient, and Hong Kong has survived the global financial crisis in 2008 and the European debt crisis in 2011,” the financial secretary said. “Therefore, I am very confident that Hong Kong can cope with the huge flow of funds under extreme circumstances.”