Hong Kong tracks Fed rate hike, impact on economy seen limited

Hong Kong's de facto central bank tracked the US Federal Reserve in lifting interest rates again on Thursday, but analysts said homeowners in the city's red-hot property market would be cushioned from the impact for now. The US central bank on Wednesday lifted borrowing costs, as expected, but indicated another two hikes this year and four in 2019 as the world's top economy continues to improve and inflation picks up. The 25 basis points rise to 1.75-2.0 percent was followed hours later by the Hong Kong Monetary Authority (HKMA), which hiked its base rate a similar amount to 2.25 percent. Policymakers in the southern Chinese financial hub are required to follow the Fed as their monetary policy is tied via the decades-old dollar peg. However, the move is unlikely to see mortgage rates in the city rise any time soon as a huge well of cash in the city's banking system means lenders have ample liquidity, keeping the crucial Hong Kong InterBank Rate (HIBOR) subdued. The increase comes as Hong Kong's property market, one of the world's most expensive, continues to power ahead despite government moves to cool it down. And analysts said the city's strong economic growth -- it grew at its fastest pace in seven years in January-March -- will keep property prices buoyant. "The Fed hike in June will probably not spill over to the real economy in Hong Kong, given the federal funds rate is still relatively low compared with levels in the previous tightening cycles," Tristan Zhuo, senior economist at Bank of China (Hong Kong) told Bloomberg News. But the HKMA's chief executive Norman Chan said Thursday he felt it was "only a matter of time" before banks increased their saving rates and best lending rates. Ken Cheung, a senior currency strategist at Mizuho Bank in Hong Kong, told Bloomberg News: "Major banks will raise the prime rate first -- as soon as this week -- and other smaller lenders will follow their lead to do the same." But he added: "Direct impacts on the housing market should be limited." The Hong Kong dollar has come under increasing pressure in recent months as rising US rates are causing investors to sell the unit and buy the higher-yielding greenback. The HKMA has spent billions this year supporting the currency as it hits the bottom end of its permitted HK$7.75-7.85 band against the US dollar. Under the Linked Exchange Rate System, the authority is required to buy the local currency at HK$7.85 to US$1 if local banks request it. The People's Bank of China did not follow suit -- as it has with past hikes -- and lift the amount it charges to lend to banks, which analysts said indicated officials may be changing policy to combat slowing growth. "China's new leadership was greeted by a much more challenging environment in 2018," said Ting Lu, Chief China Economist at Nomura investment bank, adding Beijing would likely lower rates and pick up spending in coming months to shore up growth.