Date
23 July 2018
The move by Hong Kong’s de facto central bank followed the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point in the third hike this year. Photo: Bloomberg
The move by Hong Kong’s de facto central bank followed the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point in the third hike this year. Photo: Bloomberg

Hong Kong, PBoC raise rates after Fed hike

(Updated; last posted at 9:31 a.m.)

The Hong Kong Monetary Authority on Thursday raised the base rate charged through its overnight discount window by 25 basis points to 1.75 percent, Reuters reports.

The move by Hong Kong’s de facto central bank followed the Federal Reserve’s decision to raise interest rates by a quarter of a percentage point in the third hike this year.

Hong Kong tracks the Fed’s rate moves because its currency is pegged to the US dollar.

The monetary authority sets its base rate through a formula that is 50 basis points above the prevailing US Fed Funds Target or the average of the five-day moving averages of the overnight and one-month HIBORs (Hong Kong Inter-bank Offered Rate).

Meanwhile, China’s central bank also nudged money market interest rates upward as Beijing seeks to prevent destabilizing capital outflows without hurting economic growth, Reuters reported.

Economists were surprised by the move but said at just five basis points, the increases were small and more symbolic than substantive.

The People’s Bank of China called it a “normal market reaction” to the Fed that would keep interest rate expectations reasonable and help with the deleveraging campaign.

China’s major stock indexes declined modestly after the news, with infrastructure, IT and financial shares down.

The PBoC increased rates on reverse repurchase agreements, or reverse repos, used for open market operations by 5 basis points for the seven-day and 28-day tenors.

It also said in a statement it increased rates on its one-year medium-term lending facility (MLF) also by 5 basis points.

Thursday’s move was the first time the Chinese central bank has raised rates since March, but market interest rates have risen on their own during the interim as the government pursues a range of policies to lower leverage and debt in the economy.

Chen Ji, an analyst at Bank of Communications, said the rate increase was unexpected but too small to have much meaningful impact, and represented only a response to the Fed’s rate hike.

“[It] doesn’t really impact borrowing costs, and fluctuations of this level are very normal in the interbank market,” he said, adding that he thought China’s economy was not robust enough to handle a benchmark rate increase.

Benchmark one-year lending and deposit rates have remained unchanged since October 2015, but the PBoC has increasingly relied on market rates to guide the economy.

“The move also aims to shrink the gap between short-term and long-term rates to curb [financial institutions] from using short-term loans to invest long-term debt by overly adding leverage,” said Nie Wen, economist at Hwabao Trust in Shanghai.

Nie added that a “too aggressive” rate hike would have “too much” impact to real economy.

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CG

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