A “low-rate honeymoon” for Hong Kong borrowers has come to an end with an increase in the interest rate banks use to set loan prices, a mixed blessing that drives away carry traders but threatens a property market recovery and discourages corporate borrowing, according to analysts.
The Hong Kong Monetary Authority intervened 12 times in the currency market over the past two months, successfully defending the local currency’s peg to the US dollar by buying HK$119.95 billion and selling US$15.28 billion between June 25 and August 13.
However, these interventions mopped up excess liquidity in the banking sector, prodding up the Hong Kong interbank offered rate (Hibor), which will put more pressure on borrowers whose loans are based on the rate.
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“The higher Hibor rate will definitely have a negative impact on the investment market and property trading,” said independent analyst Jasper Lo.
Hong Kong’s currency has been pegged to the US dollar since 1983 at a fixed exchange rate of HK$7.80 per US dollar. In 2005, the HKMA established a narrow trading band, allowing the Hong Kong dollar to fluctuate between HK$7.75 and HK$7.85. When the local currency’s exchange rate nears either end of that range, the HKMA buys or sells currency to alter the supply-demand equation and reel it back in.
The HKMA’s 12 recent interventions reduced the aggregate balance, a measure of banking-sector liquidity, by 69 per cent to HK$53.72 billion as of August 14 from a recent peak of HK$174 billion in May.
As a result, the overnight Hibor hit 2.7678 per cent on Friday, compared with 0.1770 per cent on August 13. The one-month Hibor, which is used to price mortgage loans, rose to 2.7706 per cent from 0.9103 per cent during the same period, while the three-month Hibor used for corporate loans rose to 2.8373 per cent from 1.6063 per cent.
The immediate impact of the higher Hibor is narrowing the interest-rate gap between the US and Hong Kong to about 1.56 percentage points on Friday, compared with more than 4 percentage points from May to mid-August.
The Hong Kong Monetary Authority logo is seen in IFC Two in Central. Photo: Jonathan Wong alt=The Hong Kong Monetary Authority logo is seen in IFC Two in Central. Photo: Jonathan Wong>
The wide gap from May triggered carry trades, where investors borrow in low-interest currencies to invest in higher-yielding assets, which pushed the Hong Kong dollar to the weak end of its peg and triggered the HKMA interventions.
“The room for carry trade is now trimming,” said Samuel Tse, a senior economist and strategist at DBS Bank in Hong Kong.
The Hong Kong dollar strengthened to HK$7.7936 on Tuesday, the highest since mid-May. It was trading at HK$7.8172 on Friday.
With the higher Hibor, homeowners with loans pegged to that rate will feel the most pain: HK$4,418 (US$566) more per month as the monthly payment increases to HK$22,452 on a HK$5 million, 30-year mortgage priced at Hibor plus 1.3 per cent, according to local mortgage broker mReferral.
That figure represents a jump of nearly 25 per cent in monthly payment, based on Friday’s mortgage rate of 3.5 per cent and a repayment of HK$18,034 on June 17, when the rate was 1.82 per cent.
Property developers and owners selling lived-in flats benefited as borrowers enjoyed three months of relatively low mortgage costs from May, when the Hibor hovered near a three-year low of 0.5 per cent, according to Eric Tso Tak-ming, chief vice-president of mReferral.
“Now the low-rate honeymoon period is over,” he said. “With the rising Hibor rates, prospective homebuyers may choose to monitor market trends and interest-rate movements before making a purchase decision.”
Tso said the higher Hibor would increase funding costs for the capital and property markets, but the impact could be manageable as the US may cut interest rates soon.
The overnight and one-month Hibor rates were likely to stay at around 3 per cent to 4 per cent in the near future, which would deter carry traders, Lo said.
The city’s strong stock market and many popular initial public offerings recently had led to strong demand for the Hong Kong dollar, which would keep the Hibor between 2 per cent and 3 per cent, said Tommy Ong, managing director of T.O. & Associates Consultancy.
If the US Federal Reserve cut interest rates, the Hibor would decline and local commercial banks would soon lower their prime lending rates, Lo said.
However, Bank of East Asia (BEA) co-CEO Adrian Li Man-kiu said commercial banks could choose not to reduce their prime rates, even though BEA expected the US to cut its key rate by 50 basis points by the end of this year.
“The saving rate is very low at the moment, so it is hard to get much lower, and hence it would be hard to cut the prime rate lower,” Li said at the bank’s results briefing on Thursday.
Hong Kong’s commercial banks trimmed their prime rate three times from September to December by a combined 62.5 basis points to 5.25 per cent or 5.5 per cent, while cutting their savings rate by the same margin to 0.25 per cent.
Ryan Lam Chun-wang, head of research for Hong Kong at Shanghai Commercial Bank, said the US would have two 25-basis-point cuts this year, accompanied by two 12.5-basis-point cuts in the Hong Kong dollar prime rate. The Hibor would stay above 2 per cent, he added.
If Hong Kong lenders were to cut the prime rate by 12.5 basis points twice, the rate would drop to a historic low of 5 per cent, and the savings rate would drop to zero.
