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Thursday, June 14, 2018, 14:04
Hong Kong follows US in raising base rate
By chinadailyasia.com & Agencies
Thursday, June 14, 2018, 14:04 By chinadailyasia.com & Agencies

Norman Chan Tak-lam, Chief Executive of the Hong Kong Monetary Authority (HKMA), talks about the Exchange Fund, which the city keeps to maintain its dollar-peg to the US unit, at a press conference at HKMA office in Central, Jan 29, 2018. (Parker Zheng / China Daily)

HONG KONG - The Hong Kong Monetary Authority (HKMA) announced Thursday that it raised its base rate to 2.25 percent from 2 percent Thursday with immediate effect according to a pre-set formula. 

According to a press release issued Thursday morning, the raise follows the 25-basis point upward shift in the target range for the US federal funds rate early Thursday. Hong Kong tracks US rate moves because its currency is pegged to the US dollar.

READ MORE: Fed lifts rates amid stronger inflation

It’s only a “matter of time” before banks raise deposit and prime rates as the upward trend in Hong Kong Interbank Offered Rates (HIBORs), the benchmark interbank lending rate, is obvious, HKMA’s chief executive Norman Chan told reporters at a press conference Thursday.

It's only a "matter of time" before banks raise deposit and prime rates, HKMA's chief executive Norman Chan told reporters at a press conference

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 percent to 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signaled it would tolerate inflation above its 2 percent target at least through 2020.

The Base Rate is the interest rate forming the foundation upon which the Discount Rates for repurchase transactions through the Discount Window are computed. 

The Base Rate is currently set at either 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month HIBORs, whichever is the higher.

Local banks still have a stockpile of more than HK$100 billion in cash, which is a solid buffer against outflows and enough to dull incentives to raise interest rates. 

Upcoming mega stock offerings from Chinese tech unicorns are expected to bring more money, as a tweak of listing rules is supposed to mark a new era for the city’s capital market.

A quarter point increase by the US central bank presents little immediate risk to a city shielded by ample liquidity and buoyant growth momentum, though it does raise the question of when local banks will push up the ceiling for rates they charge borrowers for the first time since 2006.

With the real estate market showing little sign of slowing, a prime-rate hike will pose a challenge to investors who are currently bullish on the economy, and make decisions in Washington much more relevant.

ALSO READ: HKMA spends HK$13.03b in a week to defend HK dollar

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