Hong Kong has bumped up its interest rates for the first time in over a decade as mortgage rates are set to increase in an already difficult property market.
Real estate in Hong Kong has seen signs of stress from the prospect of a rate rise, which came in line with the recent interest rate bump from the US Federal Reserve.
Three of the major banks on the island – HSBC, Hang Seng Bank and the Bank of China (Hong Kong) – will all see their rates rise in tandem from 5% to 5.125%, while Standard Chartered will see a similar rise from 5.25% to 5.375%.
However, there is some hope for the market, given that many were expecting a rate rise of 25 basis points to come into force. The Hong Kong Monetary Authority (HKMA) capitalized on the discount window overnight to usher in its official rate rise from 2.25% to 2.50% earlier on Thursday.
The overall market saw a drop of 0.5%, led by the sub-index for property on the Hong Kong Stock Exchange falling 0.9%.
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Diana Cesar, HSBC’s Hong Kong CEO, said that this news “marks the start of the normalization cycle for local interest rates, and we believe Hong Kong is well-prepared for the change.”
HSBC Asia-Pacific Adviser George Leung said that the rate rise came about from the ongoing trade disputes between China and the US, which have led to wider political uncertainty around the world. These jitters have spread to many emerging market economies in recent months, and Hong Kong is aiming to protect itself from market sentiment.
Leung suggested that Hong Kong needs to be “very cautious in order not to increase the additional burden on the local economy and society” at a time when “the economy in the future is highly uncertain and most likely on the downside.”
The HKMA must alter its rates based on moves from the US Federal Reserve since its currency links to the US dollar, but it does allow leeway for banks operating in the area to set their own “prime” rates.
The prime rates dictate where commercial banks set interest rates for their lending products, and these offerings may well differ from the Hong Kong Interbank Offered Rate (HIBOR), which citizens can choose from as well.
While Hong Kong’s interest rate changed a decade ago, it resulted in a drop of 25 basis points because of the global financial crisis. The last hike came two years before that, in 2006.
Meanwhile, Hong Kong Financial Secretary Paul Chan said that banks need to be careful when bumping up their rates, particularly because the market is currently uncertain.
Chan suggested that Hong Kong has yet to discover “the impact on our asset market,” so he expects the “interest rate burden” to have a knock-on effect on major asset classes such as the property market. He added that more caution is necessary amid the US-China trade wars and the struggles of emerging markets.
Since Hong Kong’s currency ties in with the US dollar as a throwback to the Colonial era, waves occur in the already restricted housing market every time the US Federal Reserve makes a move. It remains unclear how the current strong US economic performance will affect Hong Kong.
