Hong Kong raises base rate by 25 basis points for the first time since 2018, after first US rate increase

The Hong Kong Monetary Authority (HKMA) raised the city’s base lending rate by 25 basis points to 0.75 per cent in the first widely heralded move since December 2018, which is expected to add upwards pressure to mortgage payments linked to interbank rates.

Since Hong Kong will need to follow rate rises in the US an expected 10 times until the end of next year, the base rate is expected to increase to 3.25 per cent by the end of 2023 assuming each increase at 25 basis points. This will be the highest since September 2008.

“An interest rate rise adds to the burden of the borrowers of mortgage, corporate and personal lending. It will also add cost for investors who borrow margin loans to trade stocks or initial public offerings,” said Robert Lee Wai-wang, the lawmaker for the financial services sector who is also CEO of local broker Grand Capital Holdings.

“Banks, insurers, financial firms and pension funds, however, will benefit from higher interest income.”

For Hong Kong, the higher interest rate comes at an inconvenient moment, when the city is facing its worst outbreak of Covid-19 in more than two years, led by the highly transmissible Omicron variant, with daily death tolls in the hundreds for several consecutive days. The city’s economy is buckling under relentless social distancing rules that have shut schools and entertainment centres, and placed restrictions on restaurants and cafes.

HKMA’s move was made in lockstep with a similar increase overnight by the US Federal Reserve to maintain Hong Kong’s currency peg with the US dollar. The Fed raised its key rate by 25 basis points, from a target range of zero to 0.25 per cent, to a range of 0.25 per cent to 0.5 per cent.