HSBC hikes prime rate after fresh policy tightening

Following a new round of policy tightening, HSBC raised its key lending rate in Hong Kong, a move that is likely to be replicated by local banking peers, as the Hong Kong Monetary Authority (HKMA) warned consumers to brace themselves for higher borrowing costs.

According to a statement, Hong Kong's largest commercial lender would raise the best lending rate by 12.5 basis points to 5.75 percent effective Friday, after hiking it three times in 2022. The decision came after the HKMA raised its main interest rate by a quarter-point to match the US Federal Reserve.

“We believe the adjustments are appropriate considering the macroeconomic environment, [interest rate] trends as well as the impact on our economy,” Luanne Lim, CEO of HSBC Hong Kong, said. “We will continue to monitor the external environment and be prepared to adjust our rates if needed.”

According to Eric Tso Tak-ming, chief vice-president at mReferral, a local mortgage broker, a 12.5-basis-point rise by HSBC will add HK$347, or 1.6 percent, to HK$22,452 in monthly instalments on a typical HK$5 million, 30-year home loan.

In lockstep with the Federal Reserve, the HKMA boosted its key interest rate to a new 15-year high, with its chief warning consumers of rising pressure on local borrowing rates.

According to a statement on its website, the city's de facto central bank raised its base rate to 5.5 percent from 5.25 percent, marking the 10th consecutive hike in the last 14 months. US policymakers unanimously agreed to raise the target rate by a quarter point to a range of 5% to 5.5%, implying an impending pause.

Since 1983, Hong Kong has followed the Fed's rate decision through its linked exchange rate system in order to keep the local currency pegged to the US dollar. Since the "lift-off" in March last year to lower inflation from a four-decade high, the US central bank has tightened at each of its policy meetings.

HKMA CEO Eddie Yue Wai-man also cautioned against premature rate cuts, even if the Federal Reserve may have reached the terminal rate level, a view shared by some local and Wall Street analysts who believe this is the final hike in the current policy tightening cycle.

“Some market participants maybe over optimistic to expect a rate cut will happen later this year. The chance for a rate cut this year is highly unlikely,” Yue said in a media briefing after raising the base rate while urging the public to be careful before borrowing or taking on mortgage loans. “Also, the recent financial distress of individual US regional banks has resulted in credit tightening [in the US].”

"This is likely the end of the rate-hike cycle in the US as inflation has cooled," said Ryan Lam Chun-wang, head of research at Shanghai Commercial Bank, prior to the announcement.

Yue of the HKMA reinforced his message on the calm and orderly operation of Hong Kong's financial markets, while assuaging fears of capital flight. He emphasised that overall deposits in the banking system had climbed by 1.4% during the 14-month period of US rate increases.

He previously expressed this viewpoint when assuring markets about Hong Kong's financial stability.

Although troubled US banks had no business relations with Hong Kong lenders, Yue stated that these incidents had a negative impact on markets.

Following news that PacWest Bancorp is exploring strategic options, shares of US regional banks fell in after-hours trading, raising concerns that the turmoil engulfing the US banking sector is far from over.

According to the Federal Reserve Open Market Committee, the Fed "will closely monitor incoming information and assess the implications for monetary policy." The FOMC did not repeat a sentence from its March statement that stated, "the committee anticipates that some additional policy firming may be appropriate."

According to Yue of the HKMA, the US central bank will need more time to examine the impact of the last round of rate hikes on the US economy and inflation.

"The future path of interest rates in the United States will remain uncertain and will be determined by economic data and development." The impact on economic activity and monetary policy has yet to be determined."

A halt in policy tightening may be a tonic for Hong Kong's rate-sensitive housing market, a much-needed lift to the US$363 billion local economy following the removal of pandemic limitations, and a new engine for the faltering local stock market.

Hong Kong's economy expanded by 2.7% in the first quarter after contracting in the previous two quarters, which is widely characterised as recession. The rebound outperformed the market consensus of a 0.5% increase, supported by expenditure from government cash handouts.

According to Midland Realty, property sales in Hong Kong's primary and secondary markets totaled HK$204.9 billion (US$26.1 billion) in the first four months, a 23% increase from the same period last year. In 2022, they fell 40% to HK$554.6 billion. According to official figures, home prices increased to a six-month high in March.

Nonetheless, the benchmark Hang Seng Index has fallen 13% since peaking this year on January 27, wiping out US$391 billion in market value from its 76 blue-chip constituents, according to Bloomberg data. During the same time period, the Property sub-index fell 15%.

Separately, the HKMA intervened once more in the global currency market to keep the Hong Kong dollar within its trading range of HK$7.75 to HK$7.85. On Wednesday, it purchased HK$4.67 billion and sold the equivalent US$595 million in New York. On May 5, its total balance will fall to HK$44.53 billion.

The majority of the 12 Hong Kong-based analysts polled by the Post last week predicted the rate hike would be the last for the year, citing increased recession risks, a view held by Goldman Sachs and Bank of America economists. The survey found that local analysts were divided on whether local commercial banks will boost borrowing costs.

HSBC, Standard Chartered, and its local counterparts have maintained their prime rates steady this year until today. They hiked their prime rates by a total of 62.5 basis points last year, while policy rates increased by 500 basis points.

“Commercial banks in Hong Kong are likely to increase their prime rates this time,” Samuel Tse, an economist and strategist at DBS Bank in Hong Kong, said before the Thursday rate decision. “The interbank rates have started to pick up after the HKMA’s aggregate balance shrank.”

Higher interest rates will stifle credit growth and hamper the pace of economic recovery, he said, while burdening homeowners who must service HK$1.8 trillion in outstanding mortgages. In March, around 87% of new housing loans were tied to interbank rates, with the remaining 9% tied to prime rates.

According to the Hong Kong Association of Banks, the one-month Hibor or Hong Kong interbank offered rates - a measure of the interest banks charge each other - were at 3.41 percent on Tuesday, up from roughly 3% a month ago and 2.65 percent in February.

By fLEXI tEAM