Peg defense boosts interbank borrowing costs to two-month peak

The HIBOR for a one-month interest period hit 1.38%.

Bloomberg reports that the three-month Hong Kong dollar interbank offered rate (Hibor) has hit a two-month high after the central bank drained liquidity from the financial system by buying around $14.6b of local dollars in order to defend the currency peg to the greenback. 

The Hibor for the interest period of one month has hit 1.38% as of August 16, according to data from HSBC.

With the Hong Kong Monetary Authority (HKMA) spending roughly $75b this year alone to boost the struggling HKD, the aggregate balance is expected to fall to $92.6b which would mark the first time since 2008 that interbank liquidity has dropped below $100b.

Against a backdrop of declining aggregate balance and higher interbank rates, some banks may be prompted to hike prime rates, said Kim Man Ngan, co-head of treasury at China Everbright Bank Co.’s Hong Kong branch.

Also read: HKMA may offer extra Exchange Fund Bills to halt dollar decline

The intervention, which comes on the heels of an earlier purchase of $2.159b in Tuesday, marks the first intervention from the HKMA in three months when the HKD first touched the weak end of its $7.75-$7.85 band against the greenback last April. 

"The HKMA is fully capable of maintaining the stability of the HKD exchange rate and managing large-scale capital flows," HKMA deputy chief executive Howard Lee said in a statement, adding that the Exchange Fund holds over $4t worth of assets to shield against volatility.

The HKD Monetary Base also amounted to over $1.6t and banks held more than $4t of highly liquid assets at the end of 2017, providing a strong buffer in the event of fund outflows, he added.

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