The Hong Kong dollar interbank rate, or Hibor, has spiked considerably in recent months. Will that prompt local banks to raise interest rates? If that happens, how will property prices be affected?
It’s widely expected that the Fed will approve a quarter-point hike at its December meeting. And the market consensus is that there might be one or two hikes next year.
Yet in Hong Kong, most banks have held back on rate increases although the Fed started tightening since late 2015.
As a result, the three-month rate gap between US and Hong Kong had surpassed 50 basis points in early September, the highest since the 2008 financial crisis, putting pressure on the Hong Kong dollar exchange rate.
Rate hike decisions by local banks will largely depend on how they feel such moves will affect their profitability.
Mortgage loans remain one of the pillar loan businesses for local banks. In recent years, the mortgage loan market has switched to Hibor-based rates, instead of prime rate-based in previous years. At the moment, the Hibor rate has risen to a level that could provide incentive for banks to raise interest rates.
However, I still believe banks will put things on hold for a while.
This is because Hibor’s recent gain has been driven by a few temporary factors, including a rise in IPO activities and liquidity drainage by the Hong Kong Monetary Authority (HKMA).
HKMA, the city’s de facto central bank, has drained up to HK$80 billion from the market since August. That has decreased the balance of the banking system and pushed up the one-month Hibor rate above 0.8 percent, the highest since the financial crisis.
If HKMA keeps taking liquidity out of the market, the situation could change and banks would be more likely to hike rates.
Nonetheless, even if banks do hike rates, home prices are not going to be much affected. After all, factoring in the inflation, the real interest rate level will remain near extreme low.
This article appeared in the Hong Kong Economic Journal on Nov 2
Translation by Julie Zhu
[Chinese version 中文版]
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