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Monday, April 16, 2018, 21:17
Higher lending costs 'imminent' as HKD comes under pressure
By Evelyn Yu
Monday, April 16, 2018, 21:17 By Evelyn Yu

This photo taken in Hong Kong on Jan 12, 2008 shows Hong Kong dollar and US dollar bank notes. (LAURENT FIEVET / AFP)

HONG KONG – The benchmark prime lending rate set by leading commercial banks in Hong Kong could rise “any time from now” as United States credit costs increase, DBS says.

In the wake of the 2008 financial crisis the prime lending rate of Hong Kong’s major lenders has remained at about 5 percent

The Hong Kong Monetary Authority’s recent buying of Hong Kong dollars to draw the currency away from the weak margin of its trading band could also put upward pressure on funding costs in the market, the bank added.

In the wake of the 2008 financial crisis the prime lending rate of Hong Kong’s major lenders has remained at about 5 percent. 

READ MORE: HK dollar drops after HKMA says no plan to sell more debt

HSBC, Bank of China (Hong Kong) and Hang Seng Bank set their prime rate at 5 per cent while Standard Chartered and Bank of East Asia charge 5.25 per cent.

DBS said at a media briefing on Monday that the prime lending rate is likely to reach 5.75 percent by the year-end following increases in the city’s base rate and Hong Kong Interbank Offered Rate. 

The HKMA raised its base rate, or the discounted window rate for banks to borrow from the de facto central bank, 25 basis points to 2 percent last month, tracking a similar move by the US Federal Reserve.

Ultra-loose monetary policy applied in the aftermath of the 2008 financial crisis kept the base rate of Hong Kong at 0.5 percent until the end of 2015.

The HKMA has boosted its base rate six times since December 2015, tracking credit-cost rises in the US in line with the currency peg. 

ALSO READ: HKMA warns of asset-price swings as Fed pares balance sheet

Hibor, or the rate of interest banks charge each other for borrowing, tends to move in line with the base rate and has risen in recent months. 

One-month Hibor broke above 1 percent last November for the first time since 2008 while 12-month Hibor has rocketed half a percentage point since early last month and reached 2.06 percent on Monday. 

Analysts believe recent waves of capital outflow could impose more pressure on lending rates.

The HKMA stepped in and sold US dollars last Thursday after the Hong Kong dollar depreciated and touched the lower limit of its trading band at HK$7.85 per US unit, hitting its weakest level for 35 years. 

“HKMA’s buying of HKD and selling of USD would inevitably shrink the monetary base and thus exert upward pressure on the lending rate,” said Samuel Tse, an economist from DBS.

Under the current regime, HKMA can prop up the Hong Kong dollar by buying Hong Kong dollars and selling US units when the local currency reaches the weak limit of HK$7.85 against US unit, and vice versa should it touch the strong side at HK$7.75.

The prime lending rate is at the discretion of major banks but will eventually rise as the increasing costs of base-rate and Hibor increases are passed on. 

 Hong Kong mortgage rates are linked to either Hibor or prime lending rates. Home buyers can choose to pay a rate derived from Hibor plus a percentage – an addition of about 1.3 percent being the best advertised – or prime lending rate minus a percentage, with the best advertised rates being around 3 percent.

As banks pay more for cash, especially smaller ones with narrower deposit bases, it is natural for them to increase their prime lending rate, DBS noted.


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