The Federal Open Market Committee of the Federal Reserve (the Fed) announced earlier today (Hong Kong time) after its two-day meeting that it had decided to keep the target range for the federal funds rate unchanged at 4.25-4.5%.
The policy decision is in line with market expectations. However, the market generally considers that the pace of future rate cuts remains uncertain, as it depends on US inflation and labour market data developments, as well as the impact of tariff measures and fiscal policy on US economic activities, which remains to be observed.
In Hong Kong, the monetary and financial markets have continued to operate in an orderly manner. Following the sizable inflows in early May, the supply of Hong Kong dollar funding became abundant. Subsequently, the Hong Kong dollar exchange rate eased as the demand for Hong Kong dollar funding abated somewhat, while carry trades gained pace. Since late June, the weak-side Convertibility Undertaking (CU) has been triggered several times, with the latest triggering occurring during New York trading hours earlier this morning. As liquidity became less abundant after the weak-side CU triggering, Hong Kong dollar interbank rates increased moderately from low levels, although they remained at a distance below US dollar interest rates. The current Hong Kong dollar-US dollar interest rate differential continues to incentivise carry trades to sell Hong Kong dollars for US dollars, keeping the Hong Kong dollar trading near the 7.85 weak-side CU level. However, equity-related demand has been strong lately, providing some support to the Hong Kong dollar. Looking ahead, depending on Hong Kong dollar supply-demand dynamics, as well as other uncertain factors such as US monetary policy and interest rate trajectories, stock market sentiment, and global financial markets and fund flows, it is possible that the weak-side CU will be triggered again. In such a case, the HKMA would buy Hong Kong dollars and sell US dollars in accordance with the Linked Exchange Rate System. The Aggregate Balance would decline correspondently and Hong Kong dollar interbank rates would gradually increase.
The extent and pace of future US interest rate cuts are subject to considerable uncertainty, and the prevailing interest rate environment in Hong Kong may also evolve due to the various factors mentioned above. The public should be mindful of the possibility of an increase in Hong Kong dollar interest rates, and to properly manage the associated risks when making decisions about property purchase, investment or borrowing. The HKMA will continue to closely monitor market developments and maintain monetary and financial stability.
Hong Kong Monetary Authority
31 July 2025
