UPDATE 1-Hong Kong raises base rate after Fed hike, HK$ hits new 33-year low

Thu, 22nd Mar 2018 02:36

* HKMA raises discount window rate to 2.00 pct from 1.75 pct

* Fed sees at least two more rate increases this year

* Hong Kong dollar eases to fresh 33-year low

* HKMA says will buy HK dollar when it hits 7.85 vs dollar

By Donny Kwok

HONG KONG, March 22 (Reuters) - The Hong Kong MonetaryAuthority (HKMA) raised its base rate charged through itsovernight discount window by 25 basis points (bps) on Thursdayto 2.00 percent, in lockstep with the U.S Federal Reserve.

The move came as the Hong Kong dollar fell to a fresh33-year low, and looked set to test the low end of its tradingband, which would prompt the de facto central bank to intervene.

The Fed raised interest rates by a quarter of a percentagepoint in its first hike this year and forecast at least two morehikes for 2018, signalling growing confidence that U.S. tax cutsand government spending will boost the economy and inflation,and lead to more aggressive future tightening.

Hong Kong tracks U.S. rate moves because its currency ispegged to the U.S. dollar.

The HKMA sets its base rate through a formula that is 50 bpsabove the prevailing U.S. Fed Funds Target or the average of thefive-day moving averages of the overnight and one-month HIBORs(Hong Kong Inter-bank Offered Rate).

"The Hong Kong market has been experiencing a huge amount ofliquidity. The monetary base of Hong Kong has risen to overHK$1.6 trillion and, as a result, the interbank interest ratehad remained very low for a long time," Chan said.

"It would be a good thing for the HK dollar interest rate tonormalise in line with the US interest rate."

In December, the HKMA raised the base rate by 25 bps to 1.75percent and the central bank chief warned at the time that HongKong banks would gradually increase mortgage rates.

However, major banks such as HSBC andStandard Chartered later left the city's primelending rate unchanged.

None of Hong Kong's top banks had announced changes to theirlending rates by 0220 GMT on Thursday.

The Hong Kong dollar fell to 7.8469, inching closer to thelower end of the monetary authority's targeted trading band, asthe interest rate gap between U.S. dollar rates and Hong Kongcounterpart widened further.

"Following the US interest rate hike, I believe the HongKong dollar will soon touch its weakest level at 7.85. At thattime, we will buy HK dollars and sell US dollars," Chan toldreporters.

"HKMA will guarantee that the Hong Kong dollar will notweaken past 7.8500. This is the design and operation of thepeg," Chan said.

"As the interest rate gap has widened between Hong Kong andthe U.S., capital may flow out and that is something we don'tneed to worry about much."

The peg was put in place in 1983 and the current tradingband was set in 2005. The system requires Hong Kong's interestrates to closely mirror those in the United States and for theHKMA to intervene to defend both ends of the band.

Most market participants do not see this bout of weakness asa threat or attack on the peg, unlike instances in the past.

Hong Kong's peg to the U.S. dollar has forced the formerBritish colony to import ultra-loose monetary policy from theU.S. in recent years, with rock bottom interest rates in HongKong having fuelled soaring real estate prices.

Chan said mortgage rates in one of the world's mostexpensive property markets would have to rise in the longerterm.

"Anticipation that HK interest rates will stay at a lowlevel for a long time is an inappropriate anticipation. Peoplehave to better manage their risk in borrowing money," Chan said.

Home prices in the former British colony have surged for 15straight months despite repeated cooling measures, furtherexacerbating public discontent towards housing affordability inthe city of 7.4 million.

Analysts expect home prices, which surged 16.7 percent lastyear, to climb a further 5 to 20 percent in 2018.

Reining in a red-hot property market remains a top priorityfor the local government, but prices have been rising non-stopsince 2016 despite eight rounds of mortgage tightening measureson top of tax and regulatory policies.

"Mortgage rates have been at a low level for a long time. Asinterest rates normalise, it will put pressure for a mortgagerate hike over the long term. It is a good trend for a healthydevelopment of the Hong Kong property market," Chan added.(Reporting by Donny Kwok; Editing by Anne Marie Roantree andKim Coghill)