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Thursday, March 22, 2018, 10:27
HKMA boosts base lending rate, vows to defend peg
By Luo Weiteng
Thursday, March 22, 2018, 10:27 By Luo Weiteng

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 in Central, Jan 29, 2018. (Parker Zheng / China Daily)

HONG KONG - The Hong Kong Monetary Authority lifted the city’s base lending rate 25 basis points to 2 percent on Thursday in a sign of its determination to defend the Hong Kong dollar’s 35-year-old link to the greenback.

The move by Hong Kong’s de facto central bank brings down the curtain on the city’s years-long run of rock-bottom interest rates and came immediately after the United States Federal Reserve raised the Federal Funds Rate 25 basis points.

Expectations that interest rates will remain ultra-low for an extended period are groundless

Norman Chan, HKMA Chief Executive 

“The interest-rate in Hong Kong today is far below the normal level. However, expectations that interest rates will remain ultra-low for an extended period are groundless,” HKMA Chief Executive Norman Chan Tak-lam said on Thursday. “The normalization of interest rates will do a lot of good to the sustainable growth of Hong Kong’s economy.”

The Hong Kong dollar weakened to HK$7.8465 per US unit on Wednesday, a whisker away from the weak edge of the HK$7.75 to HK$7.85 trading range.

As the Fed progressively raises borrowing costs, with two or three more interest rate increases expected this year, the Hong Kong dollar will be under pressure to touch the weak end of the linked trading range – at which point the HKMA is committed to buying the local currency and selling the US dollar, Chan noted. This also paves the way for the city’s base lending rate to return to a normal level and help cool the red-hot property market, he added.

Chan pledged that the HKMA, acting as a “super money changer”, would defend the currency peg. He assured that there is no need to worry about the local dollar declining beyond the weak end of the trading band.

Financial Secretary Paul Chan Mo-po told a biotech summit on Thursday that he wasn’t concerned that the Fed’s interest-rate move would lead to capital outflows from Hong Kong.

Norman Chan said local banks, facing upward pressure on their financing costs from a loan-to-deposit ratio of more than 80 percent, may consider increasing their prime rate.

HSBC, Standard Chartered Bank and Hang Seng Bank said on Thursday they would retain the prime rate unchanged at 5 percent. 

sophia@chinadailyhk.com

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