Hong Kong’s money rate soars to decade high before US Fed raises key interest rates

Hong Kong’s short-term money market rates soared to their highest in at least a decade on Monday, as the city’s Financial Secretary repeated a warning to homebuyers to expect higher mortgages when the local cost of funds rise in lockstep with US benchmarks later this week.

The Hong Kong interbank offered rate (Hibor), a gauge of short-term lending between banks, with a maturity of one day, jumped 176 basis points to 3.38 per cent, its highest level since 2007. Hibor with tenors of one week and one month, both rose to their highest levels since 2008, climbing 120 basis points to 2.87 per cent and 28 basis points to 2.17 per cent respectively.

Higher rates drove the city’s currency higher for a third day, with the Hong Kong dollar changing hands at 7.8091 per US dollar after its biggest intra-day increase in 15 years last Friday, because of expectations of higher interest rates in the city.

Traders that were previously conducting arbitrage trades in the currency market by selling the low-yielding Hong Kong dollars for higher yielding US dollars were now scrambling to unwind such positions.

Commercial banks have so far left their prime rates unchanged since 2008 even as the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, has been raising its base lending in lock step with the Fed to maintain the Hong Kong dollar peg with the US dollar.