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Thursday, December 15, 2016, 15:02

Hong Kong raises base rate following US rate hike

By Duan Ting

HONG KONG - The Hong Kong Monetary Authority (HKMA) raised its overnight "discount window" lending rate by a quarter point to 1 percent. Because the Hong Kong's dollar is pegged to the US dollar, policymakers in the Chinese financial center have to follow the Fed given the 25-basis point upward shift in the target range for the US federal funds rate last night.

The base rate was adjusted upward with immediate effect according to a pre-set formula, the first time in a year.

The Hong Kong Monetary Authority raised its overnight "discount window" lending rate by a quarter point to 1 percent

The HKMA's chief executive, Norman Chan Tak-lam , said local currency interest rates will continue to track movements in the US and "the rising trend is expected to continue to be affected by the scale of outflows from the Hong Kong dollar, international developments and other factors."

Chan said the the pace of US monetary policy normalization remained uncertain owing to the tightening labour market, rising energy and commodity prices, and the fiscal policy of the incoming US administration, which could have a significant impact on inflation and inflation expectations going forward.

Chan pointed out that the pace of US monetary policy normalization was set to have some impacts on capital flows, exchange rates and asset prices in the global market and warned the public to stay vigilant and prepare for possible market volatility and risk.

Chan said the upward trend in HK's interbank interest rates was likely to be gradual, depending on the scale of outflows from HK, international developments and other related factors.

According to HKMA, under the Linked Exchange Rate System, Hong Kong had experienced a strong capital inflow since 2008, amounting to more than US$130 billion and its monetary base had expanded substantially to HK$1.6 trillion, providing the city's banking sector with ample liquidity and driving down interbank interest rates.

Most of the institutions earlier surveyed by China Daily expected the US to raise interest rates once this week. Markets also anticipate the US will enter a period of fiscal expansion, with more tax cuts and infrastructure investment to reflate the US economy.

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