Hong Kong’s de facto central bank raises base interest rate by 25 points for fourth time this year in lockstep with US monetary policy

The Hong Kong Monetary Authority (HKMA) has raised the city’s base lending rate by 25 basis points for the fourth time this year, moving in lockstep with the US Federal Reserve’s overnight increase of the same quantum, to maintain the local currency’s peg to the US dollar.

The four quarter-point increases have added 1 full percentage point to Hong Kong’s base lending rate, at 2.75 per cent with immediate effect.

Hong Kong’s currency has been pegged to the US dollar at HK$7.8 per dollar since 1983, which compels the de facto central bank to mirror the US Fed’s monetary policy to maintain the currency’s stability.

The HKMA chief executive, Norman Chan Tak-lam, said on Thursday morning the public needed to manage risks and prepare for an economic downturn and market volatility in 2019, as interest rates will continue to rise.

“The banks that relied on interbank funding will feel the heat, and they may increase their best lending rate. This will add to costs for mortgage and other borrowers,” said Chan. “The expected interest rate rises next year, together with the US-China trade war and Brexit, will all add risks to an economic downturn and volatile stock and property markets.

“The Hang Seng Index has been down 25 per cent from its peak earlier before stabilising recently. It is still down more than 10 per cent year to date. The public needs to have risk management to prepare for these downturns,” he added.

Most of the city’s banks released statements on Thursday saying they would keep their best lending rates unchanged for now. That means for HSBC, Hang Seng Bank and Bank of China (Hong Kong) the rate will stay at 5.125 per cent, while for Standard Chartered Bank and DBS it will continue at 5.375 per cent.

That will come as a relief to homeowners, who would face higher mortgage payments in the event of an increase in their banks’ prime rates.