Date
22 February 2017
Hong Kong's monetary base is at a record high of HK$1.65 trillion, more than four times that in late 2008. Photo: Bloomberg
Hong Kong's monetary base is at a record high of HK$1.65 trillion, more than four times that in late 2008. Photo: Bloomberg

Why Hong Kong banks are reluctant to follow US in hiking rates

US Federal Reserve chief Janet Yellen said on Tuesday that it’s “unwise“ to wait too long to raise interest rates as economic growth continues and inflation rises.

Therefore, the Fed might accelerate the pace of increasing rates.

The latest Fed funds futures imply a 40 percent probability of three or more rate hikes this year. Nevertheless, Hong Kong banks are unlikely to follow the US lead in raising rates for a number of reasons.

First of all, the local market is still flooded with liquidity.

After a series of quantitative easing in the wake of the global financial crisis, massive amounts of capital have flowed into Hong Kong.

Licensed banks have a record deposit of HK$11.69 trillion (US$1.49 trillion). Hong Kong’s monetary base is at a record high of HK$1.65 trillion, more than four times that in late 2008.

Unless the Fed has quickened its pace of hiking rates to the extent that money starts to flow out of Hong Kong and interbank rates start to climb significantly, Hong Kong interest rates are likely to lag that of the US.

The second reason is the soft demand for mortgage loans and thus keen competition among banks for such business.

Since the financial crisis, the Hong Kong government has launched eight rounds of counter-cyclical measures to cool the housing market.

However, these measures have failed to cap home prices. They have effectively curbed housing demand and thus demand for mortgages.

New mortgage loans slumped to 66,000 last year, the third lowest on record, showing mortgage demand continues to wane from 2010.

Grappling with intense competition, lenders have little room to hike mortgage rates. As they cannot increase the income side, they have no incentive to raise deposit rates, which will push up their funding costs.

As far as the prime lending rate is concerned, banks are keeping it flat largely because most mortgage loans are not prime-based. There is no point to hike the rate.

Mortgage loans priced with reference to prime rates started to fall in 2013 while HIBOR-based mortgage schemes have gained pace.

According to the Hong Kong Monetary Authority, the ratio of new mortgage loans priced with reference to HIBOR increased to 95.1 percent in December last year while number of new mortgage loans priced on prime rates dropped to 2.5 percent.

That’s why HIBOR-based mortgage loans have been dominating the market.

This article appeared in the Hong Kong Economic Journal on Feb. 16

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Hong Kong Economic Journal chief economist and strategist

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