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Hong Kong banks raise benchmark lending rates for first time in 12 years

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Reuters HONG KONG
By Clare Jim and Donny Kwok
HONG KONG (Reuters) - Hong Kong commercial banks raised their benchmark lending rates on Thursday for the first time in 12 years, increasing the cost of home mortgage repayments in one of the world's most expensive property markets.
The moves, which come after Hong Kong raised its base rate in lockstep with the U.S. Federal Reserve, are expected to add pressure on the city's real estate sector, which has just started to show signs of cooling on the prospect of higher rates.
Both HSBC, a major bank in the city, and Hang Seng Bank said they will raise their benchmark lending rates to 5.125 percent from 5 percent. It was not clear if or when other banks in the city would follow suit.
The Hong Kong Monetary Authority (HKMA) hiked the base rate charged through its overnight discount window to 2.50 percent from 2.25 percent earlier on Thursday.
"Today's change in rates marks the start of the normalisation cycle for local interest rates and we believe Hong Kong is well prepared for the change," HSBC Hong Kong chief executive Diana Cesar said in a statement.
Hong Kong tracks U.S. interest rate moves because its currency is pegged to the U.S. dollar, although local banks have some leeway to lag U.S. moves when setting their "prime rates".
The prime rate refers to the benchmark lending rate upon which commercial banks base their lending products. Customers can choose between a mortgage that is based on the prime rate or the Hong Kong Interbank Offered Rate (HIBOR), which is hovering around its highest level since 2008.
The last time the city's banks changed their prime rates was Nov. 10, 2008, when they cut them by 25 basis points. The last hike was in March 2006.
RISK ALERT
Hong Kong Financial Secretary Paul Chan warned of the risks posed by rising interest rates.
"The impact on our asset market is yet to be seen but this puts a high risk on the asset market because of the interest rate burden, because of the uncertainty brought about by the escalating trade conflicts between the U.S. and China, as well as external uncertainties in the emerging markets and Europe," Chan said at a briefing following the HKMA's decision.
He urged investors to exercise caution.
Hong Kong's peg to the U.S. dollar has forced the former British colony to import ultra-loose monetary policy from the U.S in recent years, with rock bottom interest rates having fuelled soaring real estate prices.
On Friday, the Hong Kong dollar experienced a sudden, sharp spike, which some market watchers attributed to expectations of a rise in bank lending rates and tight cash supply.
Facing shrinking liquidity in the interbank market, Hong Kong banks raised HIBOR-based mortgage rates last month to cover the cost, as well as increasing deposit rates to attract more money into the system.
The HKMA has tracked the Fed in raising its rates, but the city's commercial banks have up until now left their prime rates unchanged at decade-lows and only recently started to edge up mortgage rates.
Natixis said in a report last week that the time had come for a more rapid increase for Hong Kong interest rates.
"Going forward, we expect the HKD interest rates to move up quicker due to the capital outflows from carry trade activities and loans to Chinese corporates, especially when deposit growth is decelerating," said Asia Pacific chief economist Alicia Garcia Herrero.
Mortgages will be directly impacted by a hike in the prime rate, which most are linked to, increasing the funding costs for home buyers.
But with Hong Kong still in an ultra-low interest rate environment, an increase of 25 basis points will send the new effective mortgage rate to levels ranging from 2.5 percent to 2.6 percent, still very low levels.
"The rate hike is within expectations and has been digested by the market already, so the impact on property prices will be little," said Sammy Po, chief executive of Midland Realty's residential business.
"However, if the rate rises in a faster than expected pace in the future, for instance 2 to 3 percentage points within one year, then it will have a bigger impact on prices."
Natixis' Herrero said Hong Kong's real estate market will be under pressure as a result of a faster rate increase.
"After the recent correction in the stock market, we should not be surprised to see other asset classes, namely real estate, affected. This may not be such a bad outcome as the HKMA has been unable to control the asset bubble with macro-prudential tools."
(Additional reporting by Noah Sin; Editing by Sam Holmes)

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First Published: Sep 27 2018 | 10:21 AM IST

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